<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1995
1933 ACT REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
---------------------
VAN KAMPEN MERRITT
TAX FREE FUND
(Exact Name of Registrant as Specified in Charter)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (708) 684-6000
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<TABLE>
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RONALD A. NYBERG, ESQ. COPIES TO:
VAN KAMPEN MERRITT WAYNE W. WHALEN, ESQ.
TAX FREE FUND THOMAS A. HALE, ESQ.
ONE PARKVIEW PLAZA SKADDEN, ARPS, SLATE, MEAGHER & FLOM
OAKBROOK TERRACE, ILLINOIS 60181 333 WEST WACKER
(Name and Address of Agent for Service) CHICAGO, ILLINOIS 60606
</TABLE>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO THE PROVISIONS OF RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940, REGISTRANT HAS PREVIOUSLY ELECTED TO REGISTER AN INDEFINITE NUMBER OF
SHARES AND WILL FILE A RULE 24F-2 NOTICE WITH THE COMMISSION FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1995 ON OR BEFORE FEBRUARY 28, 1995. THEREFORE, NO FILING
FEE IS DUE AT THIS TIME.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two Proxy Statement/Prospectuses and
two Statements of Additional Information relating to two subtrusts of the
Registrant; Van Kampen Merritt Municipal Income Fund and Van Kampen Merritt
Insured Tax Free Income Fund. Prior to the effective date of this Registration
Statement, the Registrant will be reorganized as a Delaware business trust and
will change its name to Van Kampen American Capital Tax Free Fund, and the two
subtrusts will be renamed Van Kampen American Capital Municipal Income Fund and
Van Kampen American Capital Insured Tax Free Income Fund. This Registration
Statement is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen Merritt Municipal
Income Fund
-- Cross Reference Sheet with respect to Van Kampen Merritt Insured Tax
Free Income Fund
-- Letter to shareholders of American Capital Municipal Bond Fund
-- Notice of Special Meeting of shareholders of American Capital Municipal
Bond Fund
-- Proxy Statement/Prospectus regarding the proposed Reorganization of
American Capital Municipal Bond Fund into Van Kampen Merritt Municipal
Income Fund
-- Statement of Additional Information regarding the proposed
Reorganization of American Capital Municipal Bond Fund into Van Kampen
Merritt Municipal Income Fund
-- Letter to shareholders of American Capital Insured Municipal Portfolio
-- Notice of Special Meeting of shareholders of American Capital Insured
Municipal Portfolio
-- Proxy Statement/Prospectus regarding the proposed Reorganization of
American Capital Insured Municipal Portfolio into Van Kampen Merritt
Insured Tax Free Income Fund
-- Statement of Additional Information regarding the proposed
Reorganization of American Capital Insured Municipal Portfolio into Van
Kampen Merritt Insured Tax Free Income Fund
-- Part C Information
-- Exhibits
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROXY STATEMENT/PROSPECTUS CAPTION*
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PART A INFORMATION REQUIRED IN THE PROSPECTUS
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus........................... Outside front cover page of Proxy
Statement/Prospectus
Item 2. Beginning and Outside Back Cover Page of Proxy
Statement/Prospectus............................... Table of Contents
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors; Fee
Comparison
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of Proxy
Statement/Prospectus; Summary; The
Proposed Reorganization; Other
Information; Prospectus and
Statement of Additional
Information of the VK Fund
(incorporated by reference)
Item 6. Information about the Company Being Acquired......... Prospectus and Statement of
Additional Information of the AC
Fund (incorporated by reference)
Item 7. Voting Information................................... Voting Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; Reasons for the Proposed
Reorganization; Legal Matters
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Incorporation of Documents by
Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Incorporation of Documents by
Reference
Item 14. Financial Statements................................. Financial Statements
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate Item, so
numbered, in Part C of this Registration Statement.
</TABLE>
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* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROXY STATEMENT/PROSPECTUS CAPTION*
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<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus........................... Outside front cover page of Proxy
Statement/Prospectus
Item 2. Beginning and Outside Back Cover Page of Proxy
Statement/Prospectus............................... Table of Contents
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors; Fee
Comparison
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of Proxy
Statement/Prospectus; Summary; The
Proposed Reorganization; Other
Information; Prospectus and
Statement of Additional
Information of the VK Fund
(incorporated by reference)
Item 6. Information about the Company Being Acquired......... Prospectus and Statement of
Additional Information of the AC
Fund (incorporated by reference)
Item 7. Voting Information................................... Voting Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; Reasons for the Proposed
Reorganization; Legal Matters
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Incorporation of Documents by
Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Incorporation of Documents by
Reference
Item 14. Financial Statements................................. Financial Statements
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate Item, so
numbered, in Part C of this Registration Statement.
</TABLE>
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* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 5
DEAR VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Municipal Bond Fund (the "AC
Fund"). The Reorganization calls for the AC Fund shareholders to become
shareholders of the Van Kampen American Capital Municipal Income Fund (the "VK
Fund"), a mutual fund which pursues a substantially similar investment
objective.
The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed Reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the Reorganization, please refer to
the combined Proxy Statement/Prospectus.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the AC Fund approve the Reorganization, the assets
and liabilities of the AC Fund will be combined with those of the VK Fund and
you will become a shareholder of the VK Fund. You will receive shares of the VK
Fund approximately equal in value at the time of issuance to the shares of the
AC Fund that you hold immediately prior to the Reorganization. Class A
shareholders of the AC Fund will receive Class A shares of the VK Fund; Class B
shareholders of the AC Fund will receive Class B shares of the VK Fund; and
Class C shareholders of the AC Fund will receive Class C shares of the VK Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment VK Adviser
("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the AC Fund and the VK Fund
separately. The Reorganization will result in combining the assets and
liabilities of the AC Fund with the assets and liabilities of the VK Fund and
consolidating their operations.
The Reorganization is intended to provide various benefits to shareholders
of the AC Fund who become shareholders of the VK Fund (as well as to existing
and future investors in the VK Fund). For example, higher net asset levels would
enable the VK Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
reducing per share expense levels. Higher net asset levels also may benefit
portfolio management by permitting larger individual portfolio investments that
may result in reduced transaction costs or more favorable pricing and by
providing the opportunity for greater portfolio diversity. These benefits, in
turn, should have a favorable effect on the relative performance of the VK Fund.
The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including the approval by the AC Fund's shareholders),
which are summarized below in "The Proposed Reorganization -- Terms of the
Agreement" section of the Proxy Statement/Prospectus. These conditions are
stated in the Agreement, which is attached as Exhibit A to the combined Proxy
Statement/Prospectus.
<PAGE> 6
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the AC Fund will be exchanged for
shares of the corresponding class of the VK Fund without any sales load,
commission or other transactional fee being imposed. As more fully discussed in
the combined Proxy Statement/Prospectus, the holding period for shareholders
acquiring Class B or Class C shares in the Reorganization subject to a
contingent deferred sales charge will be measured from the time (i) the holder
purchased Class B or C shares from the AC Fund or (ii) purchased Class B or C
shares of any other Van Kampen American Capital open-end fund and subsequently
exchanged into Class B or C shares of the AC Fund. The UK will bear the costs
associated with the Reorganization, such as printing and mailing costs and other
expenses associated with the Special Meeting.
HOW WILL THE FEES PAID BY THE VK FUND COMPARE TO THOSE PAYABLE BY THE AC FUND?
It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the VK Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses applicable to the AC
Fund.
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VK FUND? WHAT HAPPENS TO MY
ACCOUNT IF THE REORGANIZATION IS APPROVED?
If the Reorganization is approved, your interest in Class A, B or C shares,
respectively, of the AC Fund will be converted automatically into the same class
of shares of the VK Fund and we will send you written confirmation that this
change has taken place. You will receive the same class of shares of the VK Fund
approximately equal in value to your Class A, B or C shares of the AC Fund. No
certificates for VK Fund shares will be issued in connection with the
Reorganization, although such certificates will be available upon request. If
you currently hold certificates representing your shares of the AC Fund, it is
not necessary to surrender such certificates.
WHO WILL ADVISE THE VK FUND AND PROVIDE OTHER SERVICES?
VK Adviser provides advisory services to the VK Fund under an arrangement
that is substantially similar to that currently in effect between the AC Fund
and AC Adviser. The contractual advisory fees payable by the VK Fund are no
higher than the contractual advisory fees applicable to the AC Fund. Van Kampen
American Capital Distributors, Inc. serves as distributor of the shares of both
the VK Fund and the AC Fund. In addition, State Street Bank & Trust Company, 225
Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713, is the
custodian of both the VK Fund and the AC Fund. ACCESS Investor Services, Inc.
("ACCESS"), P.O. Box 418256, Kansas City, Missouri 64141-9256, serves as the
transfer agent for both the VK Fund and the AC Fund.
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the shares
of the VK Fund in connection with the Reorganization. Additionally, the AC Fund
would not recognize any gain or loss as a result of the transfer of all of its
assets and liabilities solely in exchange for the shares of the VK Fund or as a
result of its liquidation. The VK Fund expects that it will not recognize any
gain
<PAGE> 7
or loss as a result of the Reorganization, that it will take a carryover basis
in the assets acquired from the AC Fund and that its holding period of such
assets will include the period during which assets were held by the AC Fund. See
"The Proposed Reorganization -- Federal Income Tax Consequences" in the combined
Proxy Statement/Prospectus.
WHAT IF I REDEEM MY AC FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?
If you choose to redeem your shares of AC Fund before the Reorganization
takes place, the redemption will be treated as a normal redemption of shares and
will be a taxable transaction, unless your account is not subject to taxation,
such as an individual retirement account or other tax-qualified retirement plan.
We hope these answers help to clarify the Reorganization proposal for you.
If you still have questions, do not hesitate to call us at 1-800-982-3482.
Please give this matter your prompt attention. We need to receive your proxy
before the shareholder meeting scheduled for September 8, 1995. If shareholders
approve the Reorganization, it is expected to take effect on [MONTH, DAY 1995].
Thank you for your investment in Van Kampen American Capital Municipal Bond
Fund.
Very truly yours,
Van Kampen American Capital Municipal Bond
Fund
Don G. Powell
President and Trustee
<PAGE> 8
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL BOND FUND
2800 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(800) 421-5666
NOTICE OF SPECIAL MEETING
SEPTEMBER 8, 1995
A Special Meeting of Shareholders of Van Kampen American Capital Municipal
Bond Fund (the "AC Fund") will be held at the Transco Tower Auditorium, Level 2,
2800 Post Oak Boulevard, Houston, Texas 77056, on September 8, 1995 at [TIME]
(the "Special Meeting"), for the following purposes:
(1) To approve a plan of reorganization pursuant to which the
AC Fund would transfer all of its assets and liabilities to the
Van Kampen American Capital Municipal Income Fund (the "VK Fund")
in exchange for corresponding Class A, B and C shares of
beneficial interest of the VK Fund, the AC Fund would distribute
such Class A, B and C shares of the VK Fund to the holders of
Class A, B and C shares of the AC Fund, respectively, and the AC
Fund would be dissolved.
(2) To transact such other business as may properly come
before the Special Meeting.
Shareholders of record as of the close of business on [MONTH, DAY] 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Nori L. Gabert
Secretary
July , 1995
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 9
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
This Proxy Statement/Prospectus is being furnished to shareholders of the
Van Kampen American Capital Municipal Bond Fund (the "AC Fund"), and relates to
the Special Meeting of Shareholders of the AC Fund (the "Special Meeting")
called for the purpose of approving the proposed reorganization of the AC Fund
(the "Reorganization") which would result in shareholders of the AC Fund in
effect exchanging their Class A, B and C shares of the AC Fund for Class A, B
and C shares, respectively, of the Van Kampen American Capital Municipal Income
Fund (the "VK Fund"), a series of the Van Kampen American Capital Tax Free Fund,
a Delaware business trust (the "VKAC Tax Free Fund"). The Reorganization would
be accomplished as follows: (1) the VK Fund would acquire all the then existing
assets and liabilities of the AC Fund in exchange for Class A, B and C shares,
of beneficial interest of the VK Fund (the "Shares"); (2) the AC Fund would
distribute the Shares to the AC Fund shareholders holding the same respective
class of shares; and (3) the AC Fund would dissolve and all shares of the AC
Fund would be cancelled.
The VK Fund is one of eight series of the VKAC Tax Free Fund, an open-end,
diversified management investment company, which is authorized to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, for
each series authorized by its Board of Trustees. Each series represents
interests in a separate portfolio of securities and other assets, with its own
investment objectives and policies. The investment objective of the VK Fund is
to provide investors with a high level of current income exempt from federal
income tax consistent with preservation of capital, which is substantially
similar to that of the AC Fund. (See "Comparisons of the VK Fund and AC
Fund -- Investment Objectives and Policies" below.) There can be no assurance
that the VK Fund will achieve its investment objective. The address and
principal executive office of the VKAC Tax Free Fund is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, telephone no. (708) 684-6000 or (800)
225-2222. The address and principal executive office of the AC Fund is 2800 Post
Oak Boulevard, Houston, Texas 77056, telephone no. (800) 421-5666. The enclosed
proxy and this Proxy Statement/Prospectus are first being sent to AC Fund
shareholders on or about [MONTH, DAY,] 1995.
---------------------
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 PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Proxy Statement/Prospectus contains information shareholders of the AC
Fund should know before voting on the Reorganization (in effect, investing in
Class A, B or C Shares, as the case may be, of the VK Fund) and constitutes an
offering of Class A, B and C Shares of the VK Fund only. Please read it
carefully and retain it for future reference. A Statement of Additional
[Continued on next page]
The date of this Proxy Statement/Prospectus is July [ ], 1995.
1
<PAGE> 10
[Continued from previous page]
Information dated [MONTH, DAY,] 1995, relating to this Proxy
Statement/Prospectus ("Reorganization SAI") has been filed with the Securities
and Exchange Commission (the "SEC") and is incorporated herein by reference. A
Prospectus and Statement of Additional Information containing additional
information about the VK Fund, each dated [MONTH, DAY,] 1995, have been filed
with the SEC and are incorporated herein by reference. A copy of the VK Fund
Prospectus accompanies this Proxy Statement/Prospectus. A Prospectus and
Statement of Additional Information containing additional information about the
AC Fund, each dated [MONTH, DAY], 1995, have been filed with the SEC and are
incorporated herein by reference. Copies of any of the foregoing may be obtained
without charge by calling or writing to the AC Fund at the telephone number or
address shown above. If you wish to request the Reorganization SAI, please ask
for the "Reorganization SAI."
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The VK Fund and the VKAC Tax Free Fund are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act of 1940, as amended (the "Act"), and in accordance
therewith file reports and other information with the SEC. Such reports, other
information and proxy statements filed by the VK Fund and the VKAC Tax Free Fund
can be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Office
at 500 West Madison Street, Chicago, Illinois. Copies of such material can also
be obtained from the SEC's Public Reference Branch, Office of Consumer Affairs
and Information Services, Washington, D.C. 20549, at prescribed rates.
The date of this Proxy Statement/Prospectus is [July ,] 1995.
2
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION................................ 4
A. SUMMARY.......................................................................... 4
The Reorganization............................................................. 4
Comparisons of the VK Fund and the AC Fund..................................... 5
Investment Objectives and Policies.......................................... 6
Advisory and Other Fees..................................................... 7
Distribution, Purchase, Valuation, Redemption and Exchange of Shares........ 8
Federal Income Tax Consequences................................................ 11
Reasons for the Proposed Reorganization........................................ 11
B. RISK FACTORS..................................................................... 13
Nature of Investment........................................................... 13
Changes in Certain Investment Practices........................................ 13
C. INFORMATION ABOUT THE FUNDS...................................................... 13
D. THE PROPOSED REORGANIZATION...................................................... 14
Terms of the Agreement......................................................... 14
Description of Securities to be Issued......................................... 15
Shares of Beneficial Interest............................................... 15
Voting Rights of Shareholders............................................... 15
Continuation of Shareholder Accounts and Plans; Share Certificates............. 16
Federal Income Tax Consequences................................................ 16
Capitalization................................................................. 18
Comparative Performance Information............................................ 18
Ratification of Investment Objective, Policies and Restrictions of
the VK Fund................................................................. 19
Legal Matters.................................................................. 19
Expenses....................................................................... 19
E. RECOMMENDATION OF THE AC BOARD................................................... 19
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING................................ 20
OTHER INFORMATION..................................................................... 20
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND..................................... 20
B. SHAREHOLDER PROPOSALS............................................................ 20
VOTING INFORMATION AND REQUIREMENTS................................................... 20
</TABLE>
3
<PAGE> 12
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by references to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VKAC Tax
Free Fund attached hereto as Exhibit A (the "Agreement"), the prospectus of the
AC Fund dated [MONTH, DAY], 1995 (the "AC Fund Prospectus") incorporated herein
by reference and the prospectus of the VK Fund dated [MONTH, DAY], 1995 (the "VK
Fund Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of
Class A, B and C Shares of the VK Fund only.
THE REORGANIZATION
On May 11, 1995, the Board of Trustees of the AC Fund (the "AC
Board")approved the Agreement. The Agreement provides that the AC Fund will
transfer all of its assets and liabilities to the VK Fund in exchange for Class
A, B and C shares of the VK Fund. At the Closing (as defined herein), the VK
Fund will issue Shares of the VK Fund to the AC Fund which VK Fund Shares will
have an aggregate net asset value approximately equal in amount to the value of
the AC Fund net assets as of the Closing. The Agreement provides that the AC
Fund will dissolve pursuant to a plan of liquidation and dissolution to be
adopted by the AC Board following the Closing, and as part of such dissolution,
will distribute to each shareholder of the AC Fund Shares of the respective
class of the VK Fund approximately equal in value to their existing shares in
the AC Fund. All members of the AC Board were elected as trustees of the VKAC
Tax Free Fund on July 21, 1995.
The AC Board has unanimously determined that the Reorganization is in the
best interests of shareholders of each class of shares of the AC Fund and that
the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the VKAC Tax Free Fund (the
"VK Board") has unanimously determined that the Reorganization is in the best
interests of shareholders of each class of shares of the VK Fund and that the
interests of existing shareholders of the VK Fund will not be diluted as a
result of the Reorganization. Management of the respective funds believes that
the proposed Reorganization of the AC Fund into the VK Fund should allow the VK
Fund to achieve future economies of scale and to eliminate certain costs of
operating the AC Fund and the VK Fund separately.
The VK Fund has agreed to pay all of the costs of soliciting approval of
the Reorganization by the AC Fund's shareholders and related costs of the
Reorganization, including expenses incurred by the AC Fund. Accordingly,
shareholders of the VK Fund after the Reorganization will bear a pro rata
portion of such expenses.
The AC Board is asking shareholders of the AC Fund to approve the
Reorganization at a Special Meeting called to be held on September 8, 1995. If
shareholders of the AC Fund approve the Reorganization, it is expected that the
Closing will be on [ , 1995], but it may be at a different time
as described herein.
THE AC BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF
THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF
THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND
REQUIREMENTS."
4
<PAGE> 13
COMPARISONS OF THE VK FUND AND THE AC FUND
The principal changes which would result from the Reorganization are listed
below:
(1) The holders of Class A, B and C shares of the AC Fund would become
holders of the same class of Shares, respectively, of the VK Fund. The AC
Fund and the VK Fund have substantially similar investment objectives and
follow similar investment strategies, although the VK Fund has greater
flexibility to invest in municipal bonds rated, at the time of investment,
between BB and B- (inclusive) by Standard & Poor's Corporation ("S&P") or
between Ba and B3 (inclusive) by Moody's Investors Service ("Moody's"). The
VK Fund also has greater flexibility to utilize options and futures, as
well as interest rate transactions such as swaps, caps, floors or collars.
In addition, the VK Fund may invest a substantial portion of its assets in
municipal securities that pay interest that is subject to the federal
alternative minimum tax, while the AC Fund may only invest up to 20% of its
assets in such securities.
(2) The VK Fund is managed by Van Kampen American Capital Investment
Advisory Corp. ("VK Adviser"), an affiliate of the AC Fund's investment
adviser, Van Kampen American Capital Asset Management, Inc. ("AC Adviser").
The annual advisory fee for the VK Fund is 0.50% of its average net assets
up to $500 million and 0.45% on net assets over $500 million. As of March
31, 1995, the VK Fund's net assets were approximately $691.9 million. The
annual advisory fee for the AC Fund is 0.50% of its daily net assets. As of
March 31, 1995, the AC Fund's net assets were approximately $352.2 million.
(3) Both the AC Fund and the VK Fund offer three classes of shares.
The Class A shares of both the VK Fund and the AC Fund are subject to an
initial sales charge of up to 4.75%. However, the initial sales charge
applicable to Class A shares of the VK Fund will be waived for Class A
Shares acquired in the Reorganization. Any subsequent purchases of Class A
shares of the VK Fund after the Reorganization will be subject to an
initial sales charge of up to 4.75%, excluding Class A Shares purchased
through the dividend reinvestment plan. Purchases of Class A shares of the
VK Fund or the AC Fund in amounts of $1,000,000 or more are not subject to
an initial sales charge but a contingent deferred sales charge of 1.00% may
be imposed on certain redemptions made within the first year after
purchase. Class B Shares of the VK Fund and Class B shares of the AC Fund
do not incur a sales charge when they are purchased, but generally are
subject to a contingent deferred sales charge of 4.00% if redeemed within
the first year after purchase, which charge is reduced to zero over a six
year period in the case of the VK Fund and over a five year period in the
case of the AC Fund. However, Class B Shares of the VK Fund acquired in the
Reorganization will remain subject to the contingent deferred sales charge
applicable to Class B shares of the AC Fund. Class C shares of the VK Fund
and the AC Fund do not incur a sales charge when purchased, but are subject
to a contingent deferred sales charge of 1.00% if redeemed within the first
year after purchase.
(4) Both the AC Fund and the VK Fund have adopted distribution plans
(the "Distribution Plans") pursuant to Rule 12b-1 under the Act and have
adopted service agreements or plans (the "Service Plans"). Both the VK Fund
and the AC Fund can charge up to 0.75% of their respective average daily
net assets attributable to Class B and C shares for reimbursement of
certain distribution-related expenses. In addition, both the VK Fund and
the AC Fund can charge up to 0.25% of the respective average daily net
assets attributable to Class A, B and C shares for the provision of ongoing
services to shareholders. Class B shares of the VK Fund and the AC Fund
automatically convert to Class A shares after six years. Unlike Class C
shares of the VK Fund, Class C shares of the AC Fund automatically convert
to Class A shares after ten years. However, Class B and C Shares of the VK
Fund
5
<PAGE> 14
acquired in the Reorganization will automatically convert to Class A shares
of the VK Fund in accordance with the same conversion schedule applicable
to Class B and C shares of the AC Fund, respectively.
Certain other comparisons between the AC Fund and the VK Fund are discussed
below.
INVESTMENT OBJECTIVES AND POLICIES
The VK Fund and the AC Fund have substantially similar investment
objectives and also share similar investment practices, but there are also
certain differences in their investment policies, practices and restrictions.
The investment objective of the VK Fund is to provide a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The investment objective of the AC Fund is to provide as high a level of current
interest income exempt from federal income tax as is consistent with the
preservation of capital.
The VK Fund and the AC Fund attempt to achieve their investment objectives
by generally investing at least 80% of their assets in diversified portfolios of
tax exempt municipal securities rated investment grade at the time of
investment.
As the table below indicates, the holdings of the VK Fund and the AC Fund
have similar credit quality, although a larger percentage of the VK Fund's
holdings have the highest credit rating of Moody's and Standard & Poor's. Unlike
the AC Fund, the VK Fund's policy as to ratings is not fundamental and may be
changed without shareholder approval.
In addition, the VK Fund may invest a substantial portion of its assets in
securities which are subject to the alternative minimum tax, while the AC Fund
may only invest up to 20% of its assets in such securities. The VK Fund also has
greater flexibility than the AC Fund to utilize options and futures, as well as
interest rate transactions such as swaps, caps, floors or collars.
A comparison of the credit quality of the respective portfolios of the VK
Fund and the AC Fund, as of March 31, 1995, is set forth in the table below.
CREDIT QUALITY
(AS OF MARCH 31, 1995)
<TABLE>
<CAPTION>
VK FUND AC FUND
----------------------------- ---------------------------
CREDIT RATING MOODY'S STANDARD & POOR'S MOODY'S STANDARD & POOR'S
- -------------------------------------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Aaa/AAA..................................... 48.4% 49.8% 19.4% 15.9%
Aa/AA....................................... 4.2 4.1 14.4 16.7
A/A......................................... 7.3 10.7 24.3 31.3
Baa/BBB..................................... 14.5 5.3 11.6 9.1
Ba/BB....................................... 2.4 6.3 0.5 2.0
B/B......................................... 0.7 0.6 0.0 0.0
Caa/CCC..................................... 0.0 0.0 0.0 0.9
Ca/CC....................................... 0.0 0.0 0.0 0.0
C/C......................................... 0.0 0.0 0.0 0.0
Unrated..................................... 22.5 23.2 29.8 24.1
----- ----- ----- -----
TOTAL............................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
6
<PAGE> 15
The VK Fund is managed by VK Adviser while the AC Fund is managed by AC
Adviser. VK Adviser and AC Adviser are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which has been developing investment strategies
and products for individuals, businesses and institutions since 1974. VK Adviser
and AC Adviser are the primary investment advisers to the Van Kampen American
Capital funds. As of March 31, 1995, VK Adviser, AC Adviser and their affiliates
managed or supervised approximately $51.7 billion of assets, including assets of
65 open-end investment companies and 38 closed-end investment companies. The
business address of VK Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois
60181. VK Adviser and the Advisory Agreement are more fully described in the VK
Fund Prospectus and Statement of Additional Information.
ADVISORY AND OTHER FEES
The AC Fund pays AC Adviser a monthly fee based on its average daily net
asset value at the annual rate of 0.50% of the AC Fund's average net assets. In
addition, the AC Fund bears most expenses associated with its operation and the
issuance and repurchase or redemption of its securities, except for the
compensation of trustees affiliated with VKAC, and officers of the AC Fund who
are interested persons of VKAC or its subsidiaries. Total operating expenses for
the period ended September 30, 1994, for the AC Fund were 0.93%, 1.72% and 1.72%
with respect to Class A, B and C shares, respectively.
The VK Fund pays VK Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.50% of the first $500 million and 0.45%
thereafter. The effective advisory fee for the fiscal year ended December 31,
1994 was .48% of the VK Fund's average daily net asset value. The VK Fund bears
most expenses associated with its operations and the issuance and repurchase or
redemption of its securities, except for the compensation of trustees affiliated
with VKAC and officers of the VK Fund who are interested persons of VKAC or its
subsidiaries. The total operating expenses of the VK Fund for the period ended
December 31, 1994 were 0.99%, 1.70% and 1.74% of the average daily net assets
attributable to Class A, B and C Shares, respectively. For a complete
description of the VK Fund's advisory services, see the respective sections in
the VK Fund's Prospectus and Statement of Additional Information entitled
"Investment Advisory Services" and "Investment Advisory and Other Services --
Investment Advisory Agreement." For a complete description of the AC Fund's
advisory services, see the respective sections in the AC Fund's Prospectus and
Statement of Additional Information entitled "The Fund and its Management" and
"Investment Advisory Agreement."
In addition, the VK Fund has adopted the Distribution Plan with respect to
each class of shares pursuant to Rule 12b-1 under the Act and has adopted the
Service Plan with respect to each class of its shares. The Distribution Plan and
the Service Plan provide that the VK Fund can charge up to 0.25%, 1.00% and
1.00% of the VK Fund's average daily net assets attributable to the Class A, B
and C shares, respectively, for reimbursement of certain distribution-related
expenses and for the provision of ongoing services to shareholders. The
Distribution Plan and the Service Plan are being implemented through an
agreement with Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"), the distributor of each class of the VK Fund's shares,
sub-agreements between VKAC Distributors and members of the National Association
of Securities Dealers, Inc. (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 VK Fund and banks who are acting as brokers for
their customers that may provide their customers or clients certain services or
assistance. VKAC Distributors, the distributor of the shares of the AC Fund,
will provide such services to its clients who become shareholders of the VK Fund
through the Reorganization and will receive compensation from the VK Fund
pursuant to the Distribution Plan and Service Plan on the same terms as other
7
<PAGE> 16
organizations providing those services. The AC Fund has a similar Distribution
Plan and Service Plan. The Distribution and Service Plans provide that the AC
Fund can charge up to 0.25%, 1.00% and 1.00% of the AC Fund's average daily net
assets attributable to the Class A, B and C shares, respectively, for
reimbursement of certain distribution-related expenses and for the provision of
ongoing services to shareholders. The Service Plan for the AC Fund provides for
payment to members of the NASD referred to above that provide their customers or
clients certain services or assistance. For a complete description of these
arrangements with respect to the VK Fund, see the section in the VK Fund's
Prospectus entitled "The Distribution and Service Plans." For a complete
description of these arrangements with respect to the AC Fund, see the
respective sections in the AC Fund's Prospectus and Statement of Additional
Information entitled "Distribution Plans."
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES
Generally, Class A Shares of the VK Fund are sold at net asset value
applicable at the time of such sale, plus a sales charge of up to 4.75% of the
offering price (which percentage is reduced on investments of $100,000 or more),
and are redeemable at their net asset value applicable at the time of
redemption. Purchases of Class A shares of the VK Fund or the AC Fund in amounts
of $1,000,000 or more are not subject to an initial sales charge, but a
contingent deferred sales charge of 1.00% may be imposed on certain redemptions
made within the first year after purchase. Class A Shares of the VK Fund
acquired in the Reorganization will not be subject to a sales charge.
Generally, Class B shares do not incur a sales charge when they are
purchased, but are subject to a contingent deferred sales charge if redeemed
within a specified period of time from the date of purchase. Class B Shares of
the VK Fund are subject to a contingent deferred sales charge equal to 4.00% of
the lesser of the then current net asset value or the original purchase price on
Class B Shares redeemed during the first year after purchase, which charge is
reduced to zero over a six year period. Class B shares of the AC Fund are
subject to a contingent deferred sales charge equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
shares redeemed during the first year after purchase, which charge is reduced to
zero over a five year period. However, Class B Shares of the VK Fund acquired in
the Reorganization will remain subject to the contingent deferred sales charge
in accordance with the same schedule that was applicable to Class B shares of
the AC Fund. Class B shares of the AC Fund and the VK Fund automatically convert
to Class A shares six years after purchase.
Generally, Class C shares do not incur a sales charge if redeemed after the
first year after purchase. Both Class C shares of the VK Fund and the AC Fund
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 such
shares redeemed during the first year after purchase and do not incur a sales
charge if redeemed after the first year from the date of purchase. See "Fee
Comparisons" below. Class C shares of the AC Fund automatically convert to Class
A shares after ten years. Class C shares of the VK Fund have no such automatic
conversion feature. However, Class C Shares of the VK Fund acquired in the
Reorganization will remain subject to the conversion schedule applicable to
Class B shares of the AC Fund.
With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. eastern time. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share would have been $ on July
, 1995. The AC Fund, however, generally computes net asset value per share by
valuing fixed income securities using
8
<PAGE> 17
the last reported bid price. When calculating the net assets of the AC Fund in
accordance with this pricing methodology, the net asset value per share was
$ on July , 1995. In connection with the Reorganization, the net
assets of the AC Fund will be calculated using the current pricing methodology
of the VK Fund.
The minimum initial investment with respect to each class of shares in the
VK Fund and the AC Fund is $500, although Shares of the VK Fund acquired in
connection with the Reorganization will not be subject to the minimum investment
limitation. The minimum subsequent investment in the VK Fund and the AC Fund is
$25. For a complete description of these arrangements with respect to the VK
Fund, see the section in the VK Fund Prospectus entitled "Purchasing Shares of
the Fund." For a complete description of these arrangements with respect to the
AC Fund, see the respective sections in the AC Fund's Prospectus and Statement
of Additional Information entitled "Purchase of Shares" and "Purchase and
Redemption of Shares."
Shares of either the AC Fund or the VK Fund may be purchased by check, by
electronic transfer or by bank wire and also offer exchange privileges [among
all] other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors.
Shares of the VK Fund and the AC Fund properly presented for redemption may
be redeemed or exchanged at the next determined net asset value per share
(subject to any applicable deferred sales charge). Shares of either the AC Fund
or the VK Fund may be redeemed or exchanged by mail or by special redemption
privileges (telephone exchange, telephone redemption by check or electronic
transfer). If a shareholder of either fund attempts to redeem shares within 15
days after they have been purchased by check, the respective fund may delay
payment of the redemption proceeds until such fund can verify that payment for
the purchase of the shares has been (or will be) received. No further purchases
of the shares of the AC Fund may be made after the date on which the
shareholders of the AC Fund approve the Reorganization, and the stock transfer
books of the AC Fund will be permanently closed as of the date of Closing. Only
redemption requests and transfer instructions received in proper form by the
close of business on the day prior to the date of Closing will be fulfilled by
the AC Fund. Redemption requests or transfer instructions received by the AC
Fund after that date will be treated by the AC Fund as requests for the
redemption or instructions for transfer of the shares of the VK Fund credited to
the accounts of the shareholders of the AC Fund. Redemption requests or transfer
instructions received by the AC Fund after the close of business on the day
prior to the date of Closing will be forwarded to the VK Fund. For a complete
description of these redemption arrangements in the VK Fund, see the section in
the VK Fund's Prospectus entitled "Redemption of Shares," and the sections in
the AC Fund's Prospectus and Statement of Additional Information entitled
"Redemption of Shares" and "Purchase and Redemption of Shares."
9
<PAGE> 18
The differences in the distribution, purchase and redemption procedures and
fee structure of the shares of the VK Fund and the shares of the AC Fund are
highlighted in the table below.
FEE COMPARISONS
<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- ------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)....................... 4.75%(1) 4.75% 4.75%(1)
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees............................................. 0.48% 0.50% 0.47%
Rule 12b-1 Fees............................................. 0.30%(4) 0.20% 0.25%
Other Expenses.............................................. 0.21% 0.23% 0.19%
Total Fund Operating Expenses............................... 0.99% 0.93% 0.91%
CLASS B SHARES
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)....................... None None None
Maximum Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds).... 4.00%(2) 4.00%(3) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees............................................. 0.48% 0.50% 0.47%
Rule 12b-1 Fees............................................. 1.00% 1.00% 1.00%
Other Expenses.............................................. 0.22% 0.24% 0.20%
Total Fund Operating Expenses............................... 1.70% 1.74% 1.67%
CLASS C SHARES(5)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price)............................. None None None
Maximum Deferred Sales Charge
(as a percentage of the lower of the original purchase
price or redemption proceeds)............................. 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees............................................. 0.48% 0.50% 0.47%
Rule 12b-1 Fees............................................. 1.00% 1.00% 1.00%
Other Expenses.............................................. 0.26% 0.24% 0.24%
Total Fund Operating Expenses............................... 1.74% 1.74% 1.71%
</TABLE>
- ---------------
(1) Class A shares of the VK Fund received pursuant to the Reorganization will
not be subject to a sales charge upon purchase.
(2) Class B Shares of the VK Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed
10
<PAGE> 19
during the first year after purchase, which charge is reduced to zero over
a six year period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%; Year
3 -- 3.50%; Year 4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%; and Year
7 -- 0.00%. However, Class B Shares of the VK Fund acquired in the
Reorganization will be subject to the contingent deferred sales charge
schedule applicable to Class B shares of the AC Fund.
(3) Class B shares of the AC Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B shares redeemed during the first
year after purchase, which charge is reduced to zero over a five year
period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year
4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
(4) As of July , 1995, the Rule 12b-1 fees for the VK Fund's Class A shares
was reduced from 0.30% to 0.25%
(5) 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, which charge is reduced to zero thereafter.
* For the fiscal year ended December 31, 1994.
** For the six months ended March 31, 1995, on an annualized basis.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the shares
of the VK Fund pursuant to the Reorganization. Additionally, the AC Fund would
not recognize any gain or loss as a result of the exchange of all of its assets
for the shares of the VK Fund or as a result of its dissolution. The VK Fund
expects that it will not recognize any gain or loss as a result of the
Reorganization, that it will take a carryover basis in the assets acquired from
the AC Fund and that its holding period of such assets will include the period
during which the assets were held by the AC Fund. See "The Proposed
Reorganization -- Federal Income Tax Consequences."
The above information is only a summary of more complete information
contained in this Proxy Statement/Prospectus and the related Statement of
Additional Information.
REASONS FOR THE PROPOSED REORGANIZATION
On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from
The Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immediately
after the acquisition, American Capital Management & Research, Inc. was merged
into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed
Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser
currently are each wholly-owned subsidiaries of VKAC.
On February 10, 1995, the VK Board and AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund in order to achieve certain economies of scale and
efficiencies, (ii) permitting exchangeability of shares between funds advised by
the VK Adviser and the AC Adviser, (iii) selecting a common transfer agent to
facilitate exchangeability and enhance shareholder services, and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").
11
<PAGE> 20
The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meeting on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.
The VK Board and the AC Board held joint meetings on March 14, 1995 and
April 6-7, 1995 to review the findings and recommendations of the Joint
Committee. The VK Board approved each element of the Consolidation, including
the merger of the VK Fund and AC Fund, on April 7, 1995 subject to approval of
the Consolidation by the AC Board. The AC Board met May 11, 1995, and
unanimously approved each element of the Consolidation, including the merger of
the VK Fund and the AC Fund. Each of the VK Board and the AC Board also approved
submitting the necessary proposals to the respective shareholders of the VK Fund
and the AC Fund to effect the Consolidation.
At separate shareholder meetings held on July 21, 1995, the shareholders of
the VK Fund and the AC Fund approved the reorganization of the VK Fund and the
AC Fund into Delaware business trusts (or series thereof) and the combination of
the VK Board and the AC Board. Shareholders of the AC Fund are now being asked
to approve its combination with the VK Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) achieve economies of scale by combining the assets
of the funds and (iii) potentially reduce transaction costs and obtain greater
portfolio diversity.
In connection with approving the combination of the AC Fund with the VK
Fund, the AC Board considered the costs resulting from the separate operations
of the AC Fund and the VK Fund in light of their substantially similar
investment objectives, policies and restrictions. The AC Board also considered
potential expense savings, economies of scale, reduced per-share expenses and
benefits to the portfolio management process that could result from combining
the assets and operations of the AC Fund and the VK Fund. In this regard, the AC
Board reviewed information provided by the AC Adviser, VK Adviser and VKAC
Distributors relating to the anticipated cost savings to the shareholders of the
AC Fund and the VK Fund as a result of the Reorganization.
In particular, the AC Board considered the probability that the elimination
of duplicative operations and the increase in asset levels of the VK Fund after
the Reorganization would result in the following potential benefits for
investors, although there can, of course, be no assurances in this regard:
(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the AC Fund and
the VK Fund may eliminate the duplication of services that currently exists
as a result of their separate operations. For example, currently the AC
Fund and the VK Fund are managed separately by different affiliated
investment entities. Consolidating the separate operations of the AC Fund
with those of the VK Fund should promote more efficient operations on a
more cost-effective basis.
(2) ACHIEVEMENT OF REDUCED PER-SHARE EXPENSES AND ECONOMIES OF
SCALE. Combining the net assets of the AC Fund with the assets of the VK
Fund also may lead to reduced expenses, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. An increase in the asset
levels of the VK Fund also could result in achieving future economies of
scale, which should also reduce per share expenses. Any significant
reductions in expenses on a per share basis should, in turn, have a
favorable effect on the relative total return of the VK Fund.
12
<PAGE> 21
(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset
levels also may enable the VK Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs and/or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.
In determining whether to recommend approval of the Reorganization to
shareholders of the AC Fund, the AC Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of VK Adviser and
other service providers to the VK Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees of the AC Fund and the VK
Fund before the Reorganization and the estimated expenses and advisory fees of
the VK Fund after the Reorganization; (3) the comparative investment performance
of the AC Fund and the VK Fund, as well as the performance of the VK Fund
compared to its peers; (4) the terms and conditions of the Agreement and whether
the Reorganization would result in dilution of AC Fund shareholder interests;
(5) the advantages of eliminating the competition and duplication of effort
inherent in marketing two funds having similar investment objectives, in
addition to the economies of scale realized through the combination of the
Funds; (6) the compatibility of the Funds' service features available to
shareholders, including the retention of applicable holding periods and exchange
privileges; (7) the costs estimated to be incurred by the respective funds as a
result of the Reorganization; and (8) the anticipated tax consequences of the
Reorganization. Based upon these factors, the AC Board unanimously determined
that the Reorganization is in the best interests of the shareholders of the AC
Fund.
B. RISK FACTORS
NATURE OF INVESTMENT
Each of the VK Fund and the AC Fund invest primarily in a portfolio of tax
exempt municipal securities. Investment in either of the VK Fund or the AC Fund
may not be appropriate for all investors.
CHANGES IN CERTAIN INVESTMENT PRACTICES
Both the VK Fund and the AC Fund may engage in certain options and
financial futures transactions, although the VK Fund has greater flexibility to
utilize options and futures, as well as interest rate transactions such as
swaps, caps, floors or collars. The VK Fund also has greater levels of
flexibility in pursuing its investment objectives through the ability to invest
up to 80% of its total assets in tax-exempt municipal securities rated BBB or
better by S&P or Baa or better by Moody's, while the AC Fund must have at least
50% of its assets invested in tax-exempt municipal securities rated A or better
by S&P and by Moody's. Further, the VK Fund may also invest up to 20% of its
assets in tax-exempt municipal securities rated between BB and B- (inclusive) by
S&P and between Ba and B3 (inclusive) by Moody's, while the VK Fund may not
invest in any securities rated below B by S&P and Moody's. Accordingly, although
the VK Fund has greater flexibility to achieve its investment objective, it also
may incur additional risks. For a complete description of the AC Fund's
investment practices, see the section in the AC Fund's Prospectus entitled
"Investment Practices" and "Investment Objective and Policies" and the section
of the VK Fund's Statement of Additional Information entitled "Additional
Investment Considerations."
C. INFORMATION ABOUT THE FUNDS
VK Fund. Information about the VK Fund is included in its current
Prospectus dated , which accompanies this Proxy Statement/Prospectus.
Additional information about the VK Fund is included in the Statement of
Additional Information which is dated the same date as the VK Prospectus. Copies
of the VK Fund's Statement of Additional Information may be obtained without
charge by calling (800) 225-2222,
13
<PAGE> 22
ext. 6504. The VK Fund files proxy material, reports and other information with
the SEC. These reports can be inspected and copied at the Public Reference
Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material can also be obtained from the Public Reference
Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20549 at prescribed rates.
AC Fund. Information about the AC Fund is included in its current
Prospectus dated . Additional information about the AC Fund is
included in its current Statement of Additional Information. Copies of the AC
Fund's Statement of Additional Information may be obtained without charge by
calling (800) 421-5666. The AC Fund files proxy material, reports and other
information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the Securities and Exchange Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, D.C.
20549 at prescribed rates.
As series of the VKAC Tax Free Fund, a Delaware business trust, and as a
Delaware business trust, the operations of the VK Fund and the AC Fund are
governed by their respective Agreements and Declarations of Trust (each, the
"Declaration"), their respective Bylaws and applicable Delaware law.
D. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary
does not purport to be complete and is subject in all respects to the provisions
of, and is qualified in its entirety by reference to, the Agreement, a copy of
which is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote at a meeting of shareholders at which a
quorum is present is required to approve the Agreement.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the VK Fund series of the VKAC Tax Free Fund
would acquire all of the assets and the liabilities of the AC Fund on the date
of the Closing in exchange for Class A, B and C Shares of the VK Fund.
Subject to AC Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or such later date as soon as practicable thereafter as the VK
Fund and the AC Fund may mutually agree.
On the date of Closing, the AC Fund will transfer to the VK Fund all of the
assets and liabilities of the AC Fund. The VKAC Tax Free Fund will in turn
transfer to the AC Fund a number of Class A, B and C Shares of the VK Fund
approximately equal in value to the net asset value of the assets of the AC Fund
transferred to the VK Fund as of the date of Closing, as determined in
accordance with the valuation method described in the VK Fund's then current
prospectus.
The AC Fund expects to distribute the Class A, B and C Shares of the VK
Fund to the holders of Class A, B and C shares of the AC Fund as the case may
be, promptly after the Closing, and to dissolve pursuant to a plan of
liquidation and dissolution adopted by the AC Board.
The AC Fund and the VKAC Tax Free Fund have made certain standard
representations and warranties to each other regarding their respective
capitalizations, status and conduct of business.
14
<PAGE> 23
Unless waived in accordance with the Agreement, the obligations of the
parties to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the AC Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or
governmental proceeding preventing or seeking to prevent the
consummation of the transactions contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and
exemptions under federal and state securities laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the agreements;
5. the effectiveness of this Proxy Statement/Prospectus under
applicable law and obtaining of any approvals, registrations or
exemptions under federal and state securities laws; and
6. the receipt of opinions of counsel relating to, among other things,
the tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the AC
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of AC Fund shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.
The AC Board recommends that you vote to approve the Agreement, as it
believes the Reorganization is in the best interests of the AC Fund's
shareholders and that the interests of the AC Fund's existing shareholders will
not be diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST
Beneficial interests in the VK Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The VKAC Tax
Free Fund's Declaration permits the trustees of the VKAC Tax Free Fund, as they
deem necessary or desirable, to create one or more separate investment
portfolios and to issue a separate series of shares for each portfolio and,
subject to compliance with the Act, to further sub-divide the shares of a series
into one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS
Holders of shares of the VK Fund are entitled to one vote per share on
matters as to which they are entitled to vote; however, separate votes generally
are taken by each series on matters affecting an individual series. The
Declaration of VKAC Tax Free Fund and the Declaration of AC Fund are
substantially identical, except that the Declaration of the VKAC Tax Free Fund
permits the VK Board or shareholders to remove a trustee with or without cause
by the act of two-thirds of such trustees or shareholders, respectively.
15
<PAGE> 24
The Declaration of the AC Fund permits (i) the AC Board to remove a trustee with
cause by the act of two-thirds of the trustees and (ii) shareholders holding a
majority of the shares of each series outstanding to remove a trustee with or
without cause. The Declaration of the AC Fund also requires the approval of 80%
of the trustees in office or majority vote of the shares of each series then
outstanding to amend these provisions.
Each of the VK Fund and the AC Fund operate as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
VK Fund, as well as shareholders of the AC Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VK Fund will establish an account
for each AC Fund shareholder containing the appropriate number of Shares of the
VK Fund. The shareholder services and shareholder programs of the VK Fund and
the AC Fund have already been conformed as part of the Consolidation.
Shareholders of the AC Fund who are accumulating AC Fund shares under the
dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to AC Fund shares, will retain the same rights and
privileges after the Reorganization in connection with the VK Fund Class A, B or
C Shares received in the Reorganization through substantially similar plans
maintained by the VK Fund. In the case of shares of the AC Fund held in
individual retirement accounts ("IRA"), the corresponding Shares of the VK Fund
will be credited to a new IRA account maintained in the name of the shareholder
by Van Kampen American Capital Trust Company, an affiliate of VKAC that acts as
the custodian of IRA accounts for VKAC Distributors-sponsored open-end
management mutual funds. Such IRA investors will be sent appropriate
documentation to confirm Van Kampen American Capital Trust Company's
custodianship.
It will not be necessary for shareholders of the AC Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the AC Fund, such certificates will become null and void.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the AC Fund and
shareholders of the VK Fund. It is based upon the Code, Treasury regulations,
judicial authorities, published positions of the Internal Revenue Service (the
"Service") and other relevant authorities, all as in effect on the date hereof
and all of which are subject to change or different interpretations (possibly on
a retroactive basis). This summary is limited to shareholders who hold their AC
Fund shares as capital assets. No advance rulings have been or will be sought
from the Service regarding any matter discussed in this Proxy
Statement/Prospectus. Accordingly, no assurances can be given that the Service
could not successfully challenge the intended federal income tax treatment
described below. Shareholders should consult their own tax advisors to determine
the specific federal income tax consequences of all transactions relating to the
Reorganization, as well as the effects of state, local and foreign tax laws.
16
<PAGE> 25
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code. It is a condition to closing that
the VKAC Tax Free Fund and the AC Fund receive an opinion from O'Melveny & Myers
to the effect that for federal income tax purposes:
1. The acquisition and assumption by the VK Fund of the assets and the
liabilities of the AC Fund in exchange solely for Class A, B or C
Shares of the VK Fund will qualify as a tax-free reorganization within
the meaning of Section 368(a)(1)(C) of the Code.
2. No gain or loss will be recognized by the AC Fund or the VK Fund upon
the transfer to, and assumption by, the VKAC Tax Free Fund of the
assets and the liabilities of the AC Fund in exchange solely for the
Class A, B or C Shares of the VK Fund.
3. The VK Fund's basis of the AC Fund assets received in the
Reorganization will, in each instance, equal the AC Fund's basis in
such assets immediately prior to the transfer, and the VK Fund's
holding period of such assets will, in each instance, include the
period during which the assets were held by the AC Fund.
4. No gain or loss will be recognized by the shareholders of the AC Fund
upon the exchange of their shares of the AC Fund for the Class A, B or
C Shares, respectively, of the VK Fund.
5. The tax basis in the Class A, B and C Shares of the VK Fund received by
the shareholders of the AC Fund will be the same as the tax basis of
the shares of the AC Fund surrendered in exchange therefor.
6. The holding period of the Class A, B and C Shares of the VK Fund
received by the shareholders of the AC Fund will include the holding
period of the shares of the AC Fund surrendered in exchange therefor.
In rendering its opinion, O'Melveny & Myers may rely upon certain
representations of the management of the AC Fund and the VKAC Tax Free Fund and
it has assumed, for purposes of such opinion, that the Reorganization will be
consummated as described in the Agreement and that the redemptions of shares of
the AC Fund occurring prior to the Closing will consist solely of redemptions in
the ordinary course of business.
The VK Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the AC Fund and its shareholders.
17
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the AC Fund and the VK
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.
CAPITALIZATION TABLE AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
VK FUND AC FUND PRO FORMA
------------ ------------ --------------
<S> <C> <C> <C>
Net assets
Class A shares(1)................................ $518,812,475 $305,953,845 $ 824,529,137
Class B shares................................... 168,825,651 39,139,420 207,905,265
Class C shares................................... 4,271,805 7,936,521 12,204,815
------------ ------------ --------------
Total.................................... $691,909,931 $353,029,786 $1,044,639,217
=========== =========== =============
Net asset value per share
Class A shares................................... $15.04 $9.98 $15.04
Class B shares................................... 15.05 9.98 15.04
Class C shares................................... 15.05 9.99 15.04
Shares outstanding
Class A shares(1)................................ 34,490,551 30,671,176 54,833,227
Class B shares................................... 11,221,067 3,922,453 13,821,693
Class C shares................................... 283,931 794,623 811,275
------------ ------------ --------------
Total.................................... 45,995,549 35,388,252 69,466,195
=========== =========== =============
Shares authorized
Class A shares................................... Unlimited Unlimited Unlimited
Class B shares................................... Unlimited Unlimited Unlimited
Class C shares................................... Unlimited Unlimited Unlimited
</TABLE>
- ---------------
(1) Includes $1,051,642 and 69,916 shares representing Class D Shares
outstanding as of March 31, 1995.
(2) Pro Forma Net assets and Net asset value per share reflect one-time
combination costs of approximately $300,500 or $.004 per share.
COMPARATIVE PERFORMANCE INFORMATION
The average annual total return for the AC Fund for the one-year,
three-year, five-year and ten-year periods ended March 31, 1995 were 1.03%,
5.49%, 6.88% and 8.62% in respect of its Class A shares; for the one-year period
ended March 31, 1995 and for the period beginning September 29, 1992 (the date
Class B Shares of the AC Fund were first offered for sale to the public) were
1.14% and 4.18% in respect of its Class B shares; and for the one-year period
ended March 31, 1995 and for the period beginning August 30, 1993 (the date
Class C Shares of the AC Fund were first offered for sale to the public) were
4.14% and 1.92% in respect of its Class C shares. The average annual total
return for VK Fund for the one-year and three-year periods ended March 31, 1995
and for the period beginning August 1, 1990 (the date Class A Shares of the VK
Fund were first offered for sale to the public) through March 31, 1995 were
2.49%, 4.64% and 7.04% in respect of its Class A Shares; for the one-year period
ended March 31, 1995 and for the period since inception, the average annual
total return for Class B Shares (inception August 24, 1992) was 3.00% and 3.41%
and for Class C
18
<PAGE> 27
Shares (inception August 13, 1993) was 5.78% and 1.39%. The foregoing returns
include the effect of the maximum sales charge applicable to sales of Shares of
both the VK Fund and the AC Fund.
The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE VK FUND
Approval of the Reorganization will constitute the ratification by AC Fund
shareholders of the investment objective, policies and restrictions of the VK
Fund. For a discussion of the investment objective, policies and restrictions of
the VK Fund, see "Summary -- Comparisons of the VK Fund and AC Fund" and the VK
Fund Prospectus accompanying this Proxy Statement/Prospectus. Approval of the
Reorganization will constitute approval of amendments to any of the fundamental
investment restrictions of the AC Fund that might otherwise be interpreted as
impeding the Reorganization, but solely for the purpose of and to the extent
necessary for, consummation of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the issuance of Class A, B and C Shares of
the VK Fund will be passed on by Skadden, Arps, Slate, Meagher & Flom, 333 West
Wacker Drive, Chicago, Illinois 60606, which serves as counsel to the VK Fund.
Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a Trustee
of the VKAC Tax Free Fund. On July 21, 1995, Mr. Whalen was elected as a Trustee
of the AC Fund.
Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by O'Melveny & Myers, 400 South Hope Street,
Los Angeles, California 90071, which serves as counsel to AC Fund. Lawrence J.
Sheehan, a former partner of O'Melveny & Myers and currently of counsel with
said firm, is a Trustee of the AC Fund. On July 21, 1995, Mr. Sheehan was
elected as a Trustee of the VKAC Tax Free Fund.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the AC
Fund will be borne by the VK Fund after the Reorganization. Accordingly, the VK
Fund and its shareholders after the Reorganization will bear such expenses of
the Reorganization. The AC Board has determined that the arrangements regarding
the payment of expenses and other charges relating to the Reorganization are
fair and equitable.
E. RECOMMENDATION OF THE AC BOARD
The AC Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of shareholders of
each class of shares of the AC Fund. THE AC BOARD RECOMMENDS VOTING FOR THE
PROPOSED REORGANIZATION.
19
<PAGE> 28
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING
It is not anticipated that any action will be asked of the shareholders of
the AC Fund other than as indicated above, but if other matters are properly
brought before the Special Meeting, it is intended that the persons named in the
proxy will vote in accordance with their judgment.
OTHER INFORMATION
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND
At the close of business on [ ], 1995, the record date for the
Meeting, there were [ ] Class A, [ ] Class B and [ ] Class C Shares,
respectively, of the AC Fund outstanding and entitled to vote at the meeting. As
of such date, no person was known by the AC Fund to own of record or
"beneficially" five percent or more of the outstanding shares of the AC Fund as
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended. At the close of business on March 31, 1995, there were
34,420,635 Class A, 11,221,067 Class B and 283,931 Class C Shares, respectively,
of the VK Fund outstanding. As of such date, no person was known by the VKAC Tax
Free Fund to own of record or "beneficially" five percent or more of the
outstanding shares of the VK Fund as determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
The amount of the AC Fund shares owned by the Trustees and officers of the
AC Fund as a group as of [ ], 1995 was [ ] Class A, [ ] Class
B and [ ] Class C shares, respectively, or [ ]% of Class A, [ ]% of
Class B and [ ]% of Class C of the AC Fund's outstanding shares. No Trustee
or officer of the AC Fund owned in excess of 1% of the AC Fund Shares as of such
date. The amount of the VK Fund shares owned by the trustees and officers of the
VKAC Tax Free Fund as a group as of [ ], 1995 was [ ] Shares. No
trustee or officer of the VKAC Tax Free Fund owned in excess of 1% of the VK
Fund Shares.
B. SHAREHOLDER PROPOSALS
As a general matter, the AC Fund does not intend to hold future regular
annual or special meetings of shareholders unless required by the Act. Any
shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the VK Fund should send such proposal to the VK Fund at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be considered for
presentation at a shareholders' meeting, rules promulgated by the SEC require
that, among other things, a shareholder's proposal must be received at the
offices of the VK Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
VOTING INFORMATION AND REQUIREMENTS
Each valid proxy given by a shareholder of the AC Fund will be voted by the
persons named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the AC Board "FOR"
approval of the Reorganization.
20
<PAGE> 29
Shareholders who execute proxies may revoke them at any time before they
are voted by filing with the Fund a written notice of revocation, by delivering
a duly executed proxy bearing a later date, or by attending the Special Meeting
and voting in person.
The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.
The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. Approval of the Reorganization will require the favorable vote
of the holders of a majority of the outstanding shares of the AC Fund entitled
to vote at the Special Meeting at which a quorum is constituted. Shares not
voted with respect to a proposal due to an abstention or broker non-vote will be
deemed votes not cast with respect to such proposal, but such shares will be
deemed present for quorum purposes.
In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Special Meeting, the persons named in the
proxy may propose and vote in favor of one or more adjournments of the Special
Meeting to permit further solicitation of proxies. If sufficient shares were
present to constitute a quorum, but insufficient votes had been cast in favor of
the Reorganization to approve it, proxies would be voted in favor of adjournment
only if the AC Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the AC Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
Proxies of shareholders of the AC Fund are solicited by the AC Board. The
cost of solicitation will be paid by the VK Fund after the Reorganization.
Additional solicitation may be made by mail, personal interview, telephone,
facsimile and telegraph by personnel of the AC Fund or AC Adviser who will not
be additionally compensated therefor.
[ ], 1995
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
21
<PAGE> 30
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
---------------------
This Statement of Additional Information provides information about the Van
Kampen American Capital Municipal Income Fund (the "VK Fund"), a series of the
Van Kampen American Capital Tax Free Fund ("VKAC Tax Free Fund"), an open-end,
series management investment company, in addition to information contained in
the proxy statement/prospectus of the VK Fund, dated [ ], 1995,
which also serves as the proxy statement of the Van Kampen American Capital
Municipal Bond Fund (the "AC Fund"), in connection with the issuance of Class A,
B and C shares of the VK Fund to shareholders of the AC Fund. This Statement of
Additional Information is not a prospectus. It should be read in conjunction
with the Proxy Statement/Prospectus, into which it has been incorporated by
reference and which may be obtained by contacting the VKAC Tax Free Fund located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181 (telephone No. (708)
684-6000 or (800) 225-2222) or the AC Fund located at 2800 Post Oak Boulevard,
Houston, Texas 77056 (telephone no. (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the AC Fund................................................ 2
Additional Information About the VK Fund and the VKAC Tax Free Fund................... 2
Additional Information About the AC Fund.............................................. 2
Financial Statements.................................................................. 2
Pro Forma Financial Statements........................................................ 2
</TABLE>
The VKAC Tax Free Fund will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
1
<PAGE> 31
PROPOSED REORGANIZATION OF THE AC FUND
The shareholders of the AC Fund are being asked to approve the sale of all
the assets and liabilities of the AC Fund in exchange for Class A, B and C
Shares of the VK Fund series of the VKAC Tax Free Fund (the "Reorganization").
For detailed information about the Reorganization, AC Fund shareholders
should refer to the Proxy Statement/Prospectus.
ADDITIONAL INFORMATION ABOUT THE VK FUND AND THE VKAC TAX FREE FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Fund, dated [ ], 1995, attached
as Appendix A to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE AC FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the AC Fund, dated January 31, 1995, attached as
Appendix B to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in its entirety is (i) the audited
financial statements of the AC Fund for fiscal year ended September 30, 1994,
attached as Appendix C to this Statement of Additional Information, (ii) the
unaudited financial statements of the AC Fund for the six months ended March 31,
1995, attached as Appendix D to this Statement of Additional Information, and
(iii) the audited financial statements of the VK Fund for the fiscal year ended
December 31, 1994, attached as Appendix E to this Statement of Additional
Information.
PRO FORMA FINANCIAL STATEMENTS
Set forth below are unaudited pro forma financial statements of the VK Fund
giving effect to the Reorganization, which include (i) Pro Forma Condensed
Statement of Assets and Liabilities at December 31, 1994; (ii) Pro Forma
Condensed Statement of Operations for the year ended December 31, 1994; and
(iii) Pro Forma Portfolio of Investments at December 31, 1994.
2
<PAGE> 32
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VK FUND AC FUND ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments, at Market Value (cost of
$667,323,342, $317,276,106 and
$984,599,448, respectively)(2)......... $652,138,108 $323,637,945 $ 0 $ 975,776,053
Short Term Investments................. 0 9,440,000 0 9,440,000
Other Assets less Liabilities(3)....... 7,216,006 6,788,358 (300,500) 13,703,864
------------ ------------ ----------- --------------
Net Assets............................. $659,354,114 $339,866,303 $ (300,500) $ 998,919,917
=========== =========== ========== =============
Net Assets Consist of:
Capital(3)........................... $698,739,659 $344,023,529 $ (300,500) $1,042,462,688
Accumulated Distributions in Excess
of Net Investment Income............. (228,298) (857,562) 0 (1,085,860)
Net Unrealized
Appreciation/Depreciation on
Investments.......................... (13,135,218) 6,361,839 0 (6,773,379)
Accumulated Net Realized Loss on
Investments.......................... (26,022,029) (9,661,503) 0 (35,683,532)
------------ ------------ ----------- --------------
Net Assets............................. $659,354,114 $339,866,303 $ (300,500) $ 998,919,917
=========== =========== ========== =============
Class A Shares:
Net Assets including the conversion
of Class D shares (VK Fund) to
Class A shares.................... $496,797,310 $295,786,556 $ (238,357) $ 792,345,509
Shares Outstanding(1)................ 34,836,991 30,891,664 (10,149,269) 55,579,386
------------ ------------ --------------
NAV.................................. $14.26 $9.57 $14.26
=========== =========== =============
Class B Shares:
Net Assets........................... $158,705,886 $ 36,619,883 $ (58,741) $ 195,267,028
Shares Outstanding(1)................ 11,128,652 3,822,901 (1,254,887) 13,696,666
------------ ------------ --------------
NAV.................................. $14.26 $9.58 $14.26
=========== =========== =============
Class C Shares:
Net Assets........................... $ 3,850,918 $ 7,459,864 $ (3,402) $ 11,307,380
Shares Outstanding(1)................ 270,017 778,038 (254,906) 793,149
------------ ------------ --------------
NAV.................................. $14.26 $9.59 $14.26
=========== =========== =============
</TABLE>
- ---------------
(1) The pro forma net asset value per share assumes the issuance by the VK Fund
of 20,742,395 Class A Shares, 2,568,014 Class B Shares and 523,132 Class C
Shares in exchange for the assets and liabilities of the AC Fund at a net
value of $14.26 per share.
(2) Due to inherent differences in the pricing methodologies of the two funds,
the market value of the AC Fund will be increased by approximately
$1,400,000, or $0.04 per share, upon reflecting the pricing methodology
used by the VK Fund.
(3) In connection with the transaction, the VK Fund will incur non-recurring
costs associated with the combination of approximately $300,500, or $.004
per share.
3
<PAGE> 33
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VK FUND AC FUND ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Interest Income........................ $ 49,581,836 $ 24,487,547 $ 0 $ 74,069,383
------------ ------------ ----------- -------------
Expenses:
Investment Advisory Fee(1)............. 3,475,616 1,781,081 (178,000) 5,078,697
Distribution (12b-1) and Service
Fees(2)................................ 3,333,395 1,056,555 (271,000) 4,118,950
All Other Expenses(3).................. 1,484,254 801,200 (130,400) 2,155,054
------------ ------------ ----------- -------------
Total Expenses 8,293,265 3,638,836 (579,400) 11,352,701
------------ ------------ ----------- -------------
Net Investment Income.................... $ 41,288,571 $ 20,848,711 $ 579,400 $ 62,716,682
=========== =========== ========= ============
Realized and Unrealized Loss on
Investments:
Net Realized Loss on Investments....... $(15,519,375) $ (70,117) $ 0 $ (15,589,492)
Net Change in Unrealized Depreciation
on Investments During the Period....... (76,400,277) (34,062,389) 0 (110,462,666)
------------ ------------ ----------- -------------
Net Realized and Unrealized Loss on
Investments.............................. $(91,919,652) $(34,132,506) $ 0 $(126,052,158)
=========== =========== ========= ============
Net Increase (Decrease) in Net Assets
from Operations........................ $(50,631,081) $(13,283,795) $ 579,400 $ (63,335,476)
=========== =========== ========= ============
</TABLE>
- ---------------
(1) Reflects the management fee of .50% of net assets up to $500 million and
.45% thereafter.
(2) In conjunction with the proposed transaction, the Class A Share Distribution
and Service Plan for the VK Fund will be modified such that the maximum
expense will be reduced from .30% of average net assets to .25%.
(3) Represents the reduction in operating expenses resulting from a larger, more
efficient fund rather than two smaller funds.
4
<PAGE> 34
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
MUNICIPAL BONDS
ALABAMA 1.9%
2,805 Alabama Higher Edl Ln Corp...................... 6.000 09/01/07 2,722,477
2,100 Alabama St Indl Dev Auth Rev.................... 7.500 09/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A.............. 6.750 08/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec
Inds Inc Rfdg................................... 6.500 02/15/09 4,489,851
700 Citronelle, AL Util Brd Rev..................... 9.000 05/01/13 747,600
1,225 IDB of the City of Bessemer, AL Rohn Inc Ser
91A............................................. 9.000 09/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser
91A............................................. 9.500 09/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev.............. 5.000 08/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev.............. 5.125 08/01/18 880,738
------------
18,654,601
------------
ALASKA 1.4%
2,500 Alaska Energy Auth Pwr Rev...................... 6.250 07/01/21 2,335,050
5,690 Kasaan, AK Lease Rev............................ 8.000 08/15/16 5,979,507
8,000 North Slope Borough, AK Cap Apprec Ser B........ * 06/30/04 4,389,840
1,000 Valdez, AK Marine Term Rev...................... 7.125 12/01/25 1,004,140
------------
13,708,537
------------
ARIZONA 2.4%
1,000 Maricopa Cnty AZ Indl Dev....................... 6.500 07/01/09 969,030
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev
Borden Inc Proj................................. * 10/01/12 964,750
1,000 Pima Cnty AZ Indl Dev Auth...................... 6.625 11/01/14 958,420
230 Pinal Cnty, AZ Indl Dev Auth Rev................ 9.000 12/01/13 235,957
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A...... 9.500 07/01/10 6,119,458
5,290 Salt River Proj AZ Agric........................ 7.875 01/01/28 5,719,548
500 Scottsdale, AZ Indl Dev Ser..................... 8.250 06/01/15 503,415
500 Tempe, AZ Indl Dev Auth Ser A................... 6.750 12/01/13 456,275
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed
Aermod Cent Inc................................. 8.700 09/01/19 7,697,480
------------
23,624,333
------------
ARKANSAS 0.8%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp
Impt Dist No 8 AR Impt Ser A.................... 9.750 07/01/12 3,440,630
</TABLE>
5
<PAGE> 35
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp
Impt Dist No 8 AR Impt Ser B.................... 9.750 07/01/12 3,440,630
750 Pope Cnty, AR Pollutn Ctl Rev................... 11.000 12/01/15 799,845
------------
7,681,105
------------
CALIFORNIA 7.1%
6,880 California Edl Fac Auth Rev College Of
Osteopathic Med Pacific......................... 7.500 06/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev Kaiser
Permanente Med.................................. 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev Dept of
Corrections CA St Prison Susanville Ser D....... 5.250 06/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Sisters Charity........................... 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Sisters Charity........................... 5.000 12/01/23 1,704,461
2,000 Compton, CA Ctfs Partn Ser B.................... 7.500 08/01/15 2,049,640
4,325 Delano, CA Ctfs Partn Ser A..................... 9.250 01/01/22 4,649,375
1,000 El Centro, CA Ctfs Partn........................ 7.000 06/01/19 921,310
1,000 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates
Proj Rfdg....................................... 7.875 02/01/15 1,000,000
10,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev
Multi Cap Fac Proj IV........................... 5.000 12/01/08 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin
Auth Rev Grand Cent Sq Ser A.................... 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin
Auth Rev Grand Cent Sq Ser A.................... 5.900 12/01/26 836,100
2,000 Los Angeles, CA Regl Arpts Rev.................. 11.250 11/01/25 2,170,260
2,000 Los Angeles, CA Wtr & Pwr Rev................... 5.375 09/01/23 1,594,740
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/05 570,680
900 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/10 323,415
800 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/11 268,584
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/12 219,156
</TABLE>
6
<PAGE> 36
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/13 204,295
700 Monterey, CA Regl Wastewater Fin Auth Wastewater
Contract Rev.................................... * 06/01/14 190,358
500 Norco, CA Swr Issue Rfdg........................ 6.700 10/01/13 468,090
500 Norco, CA Swr Issue Rfdg........................ 7.200 10/01/19 468,275
300 Northern CA Pwr Rev............................. 5.000 07/01/09 243,057
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1
Aliso Viejo Ser A............................... 7.350 08/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease Rev Ser A
Rfdg............................................ 5.400 11/01/20 5,799,500
1,750 San Joaquin Hills, CA Tran...................... 6.750 01/01/32 1,438,850
1,000 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg.... 7.000 09/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice
Cent Proj Ser A Rfdg............................ 5.900 09/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj Ser C
Rfdg............................................ 5.250 09/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc Rev Yorba
Linda Redev Proj Ser A.......................... * 09/01/19 951,650
------------
70,961,959
------------
COLORADO 5.6%
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A...... 8.875 08/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A...... 8.875 08/01/11 3,434,668
1,560 Arapahoe Cnty, CO Single Family Mtg Rev......... 8.375 08/01/19 1,606,566
500 Berry Creek Metro Dist Eagle 6.................. 8.250 12/01/11 518,810
500 Boulder Cnty, CO Indl Dev Rev................... 8.875 01/01/17 515,610
800 Colorado Hlth Fac Auth Rev...................... 6.625 02/01/13 721,368
500 Colorado Hlth Fac Auth Rev...................... 7.000 08/01/15 468,490
1,500 Colorado Hlth Fac Auth Rev...................... 6.250 02/15/21 1,392,795
3,900 Colorado Hlth Fac Auth Rev Hosp North CO
Med Cent........................................ 6.000 05/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser A........... 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser A........... 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser A........... 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1 Ser A
Rfdg............................................ * 12/01/06 4,565,145
1,000 Dove Valley Metro Dist CO....................... 9.500 12/01/08 1,044,190
1,000 Edgewater, CO Redev Rev Tax..................... 6.750 12/01/08 951,510
3,690 Jefferson Cnty, CO Residential Mtg Rev.......... 11.500 09/01/12 5,553,856
</TABLE>
7
<PAGE> 37
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
5,000 Meridian Metro Dist CO Peninsular & Oriental
Steam Navig Co Rfdg............................. 7.500 12/01/11 5,121,750
630 Mountain Vlg Metro Dist CO...................... 7.950 12/01/03 631,921
500 Mountain Vlg Metro Dist CO...................... 8.100 12/01/11 515,930
5,000 University of CO Hosp Auth Hosp Rev Ser A....... 6.400 11/15/22 4,891,450
------------
55,950,622
------------
CONNECTICUT 0.7%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing
Home Pgm AHF/Hartford........................... 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A............................ 5.500 03/15/10 1,839,160
------------
6,885,251
------------
DISTRICT OF COLUMBIA 0.6%
4,000 District of Columbia Ctfs Partn................. 7.300 01/01/13 3,808,240
2,500 District of Columbia Rev Ser A.................. 7.700 01/01/23 2,497,125
------------
6,305,365
------------
FLORIDA 3.9%
500 Atlantic Beach, FL Rev Ser A.................... 7.500 10/01/02 490,455
500 Atlantic Beach, FL Rev Ser A.................... 7.875 10/01/08 487,245
1,000 Broward Cnty, FL Edl Auth Rev................... 8.500 04/01/10 1,123,260
1,760 Broward Cnty, FL Res Rec Rev.................... 7.950 12/01/08 1,885,100
2,295 Broward Cnty, FL Res Rec Rev.................... 7.950 12/01/08 2,458,128
1,000 Charlotte Cnty, FL Hosp Rev..................... 8.250 08/15/18 1,104,900
3,000 Emerald Coast, FL Hsg Corp Hsg Rev Ser A 1991... 9.500 01/01/22 3,000,000
560 Florida St Brd Edl Cap Ser A.................... 7.250 06/01/23 585,709
590 Florida St Brd Edl Cap Ser A.................... 7.250 06/01/23 640,214
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev
Environmental Preservation 2000 Ser A........... 4.750 07/01/10 4,114,850
245 Gtr Orlando Aviation Rev........................ 8.375 10/01/16 272,337
2,255 Gtr Orlando Aviation Rev........................ 8.375 10/01/16 2,445,028
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg...... 5.750 03/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg...... 5.750 03/01/05 796,527
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev
Indiantown Cogeneration Proj A Rfdg............. 7.875 12/15/25 2,920,425
1,000 Orange Cnty, FL Dev Tax Rev..................... 6.000 10/01/16 922,460
2,000 Orlando, FL Util Commn Rev...................... 8.625 10/01/05 2,096,920
</TABLE>
8
<PAGE> 38
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
855 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth
Sys Rev Sun Coast Hosp Ser A.................... 8.500 03/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth
Sys Rev Sun Coast Hosp Ser A.................... 8.500 03/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park........................... 10.000 07/01/22 4,420,486
1,000 St. Petersburg, FL Hlth Fac Rev................. 7.750 12/01/15 1,105,600
670 Tampa, FL Cap Impt Prog Rev..................... 8.250 10/01/18 693,101
------------
38,486,243
------------
GEORGIA 1.3%
3,000 Atlanta, GA Arpt Fac Rev........................ 6.250 01/01/21 2,692,860
1,000 Burke Cnty, GA Dev Auth Pollutn Ctl Rev......... 9.375 12/01/17 1,106,340
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs
Franklin Forest Ser A........................... 8.000 06/01/22 2,925,000
1,750 Georgia Muni Elec Auth Pwr Rev.................. 8.375 01/01/16 1,899,362
850 Georgia Muni Elec Auth Pwr Rev.................. 6.000 01/01/20 748,493
2,000 Georgia Muni Elec Pwr Rev Ser................... 7.875 01/01/18 2,089,120
1,250 Municipal Elec Auth GA Spl Oblig................ 8.125 01/01/17 1,348,187
500 Rockdale Cnty, GA Dev Auth...................... 7.500 01/01/26 478,640
------------
13,288,002
------------
HAWAII 2.4%
4,055 Hawaii St Arpts Sys Rev Ser 1993................ 6.350 07/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev
Hawaiian Elec Co................................ 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev Continental
Airls Inc....................................... 9.600 06/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev Continental
Airls Inc....................................... 9.700 06/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev................... 6.350 07/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev................... 6.400 07/01/08 1,568,268
500 Hawaii St Harbor Cap Impt Rev................... 7.000 07/01/17 503,760
------------
23,920,514
------------
ILLINOIS 10.9%
4,500 Bedford Park, IL Tax Increment Rev Sr Lien
Bedford City Sq Proj............................ 9.250 02/01/12 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr Lien......... 8.250 07/01/13 6,895,000
</TABLE>
9
<PAGE> 39
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
1,000 Chicago IL Gas Supply Rev....................... 8.100 05/01/20 1,090,930
1,000 Chicago IL Metro Wtr Dist....................... 7.000 01/01/11 1,050,300
1,000 Chicago IL O'Hare Arpt Rev Ser A................ 6.000 01/01/18 880,290
1,000 Chicago IL O'Hare Arpt Rev Ser B................ 6.000 01/01/18 883,380
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser C1......... 5.750 01/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
Intl Terminal................................... 6.750 01/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc................................ 8.500 05/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc Ser A.......................... 8.400 05/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac Rev
United Airls Inc Ser B.......................... 8.950 05/01/18 5,436,274
1,000 Cook Cnty Cmnty College #508.................... 8.750 01/01/07 1,196,670
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233
Homewood & Flossmor Ser B....................... * 12/01/12 514,794
1,000 Crestwood, IL Tax Increment..................... 7.250 12/01/08 941,600
1,000 Du Page Cnty, IL Alt Rev........................ 6.550 01/01/21 1,048,980
950 Hanover Park, IL Rev 1st Mtg.................... 9.250 12/01/07 1,008,444
4,800 Hodgkins, IL Tax Increment...................... 9.500 12/01/09 5,184,000
1,000 Illinois Edl Fac Auth Rev....................... 6.750 10/01/21 988,880
1,000 Illinois Edl Fac Auth Rev....................... 6.900 12/01/21 1,074,180
1,000 Illinois Hlth Fac Auth Rev...................... 6.750 08/15/11 982,290
500 Illinois Hlth Fac Auth Rev...................... 6.625 10/01/12 475,920
1,000 Illinois Hlth Fac Auth Rev-8.................... 8.125 01/01/13 1,068,560
1,000 Illinois Hlth Fac Auth Rev...................... 6.300 08/01/13 895,340
2,000 Illinois Hlth Fac Auth Rev...................... 6.000 04/01/18 1,775,900
1,000 Illinois Hlth Fac Auth Rev...................... 7.700 10/01/19 1,100,940
1,000 Illinois Hlth Fac Auth Rev...................... 7.250 05/01/22 954,280
</TABLE>
10
<PAGE> 40
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj A.......................................... 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group
Proj B.......................................... 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser
D............................................... 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser
D............................................... 9.500 11/15/15 512,512
1,150 Illinois Hlth Fac Auth Rev Holy Cross Hosp
Proj............................................ 6.700 03/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med
Cent Chicago Ser A.............................. 10.250 02/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser
A............................................... 6.250 08/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser
A............................................... 6.375 08/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United Med Cent...... 8.375 07/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential Mtg Rev....... 9.086 02/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic Cent Ser
B............................................... * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A..................... 8.000 06/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins Res
Recovery Partners Ser A......................... 9.250 10/15/14 7,216,230
865 Round Lake, IL Beach Ser 199.................... 7.200 12/01/04 832,406
500 Round Lake, IL Beach Ser 199.................... 7.500 12/01/13 429,555
1,705 St Charles, IL Indl Dev Rev..................... 7.500 11/01/13 1,592,742
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A.... 5.800 04/01/10 1,381,692
------------
108,751,549
------------
INDIANA 1.8%
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp
Inc............................................. 7.000 07/01/12 2,770,818
2,000 Indiana Fin Auth Arpt Rev....................... 6.250 11/01/16 1,808,420
1,000 Indiana Hlth Fac Fing Auth...................... 6.850 07/01/22 991,440
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal
Express Corp Proj............................... 7.100 01/15/17 2,874,510
550 Indianapolis, IN Loc Pub Impt................... 6.750 02/01/14 540,133
2,000 Indianapolis, IN Loc Pub Impt................... 6.700 01/01/17 1,896,720
1,000 Indianapolis, IN Loc Pub Impt................... 6.000 02/01/20 891,110
1,000 Indianapolis, IN Loc Pub Impt................... 6.750 02/01/20 951,340
450 Indianapolis, IN Loc Pub Impt................... 6.500 02/01/22 411,660
1,000 Marion Cnty, IN Hosp Fac Rev.................... 6.500 09/01/13 948,100
1,000 Petersburg, IN Pollutn Ctl Rev.................. 6.100 01/01/16 884,750
</TABLE>
11
<PAGE> 41
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
1,500 St Joseph Cnty, IN Hosp Rev..................... 6.250 08/15/22 1,368,240
1,500 Wells Cnty, IN Hosp Auth Rev.................... 8.500 04/15/03 1,484,805
------------
17,822,046
------------
IOWA 0.5%
25,000 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser
A............................................... * 09/01/16 2,214,250
3,000 Muscatine, IA Elec Rev.......................... 5.000 01/01/08 2,536,440
145 Pocahontas, IA Indl Dev Rev..................... 10.250 10/01/00 150,472
------------
4,901,162
------------
KANSAS 0.2%
1,000 Burlington KS Pollutn Ctl Rev Rfdg.............. 7.000 06/01/31 1,005,790
1,000 Newton, KS Hosp Rev Ser......................... 7.750 11/15/24 947,830
------------
1,953,620
------------
KENTUCKY 2.1%
1,000 Bowling Green, KY Indl Dev Rev Coltec
Inds Inc Rfdg................................... 6.550 03/01/09 938,510
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds
Inc............................................. 9.875 10/01/10 2,842,532
10,950 Jefferson Cnty, KY Cap Corp..................... * 08/15/14 2,611,027
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys
Proj............................................ 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland
Hosp Corp Ser A Rfdg & Impt..................... 6.125 02/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D................. 7.450 01/01/23 2,190,924
8,000 Kentucky St Tpk Res Rec Rd...................... 5.000 07/01/08 6,816,480
1,000 Kentucky St Tpk Toll Rd Rev..................... 5.500 07/01/07 914,500
------------
21,438,436
------------
LOUISIANA 1.1%
1,000 Hodge, LA Util Rev Comb......................... 9.000 03/01/10 1,028,380
2,600 Lafayette, LA Econ Dev Auth Indl Dev Rev
Advanced Polymer Proj Ser 1985.................. 10.000 12/31/00 2,672,644
1,000 Lake Charles, LA Harbor & Term.................. 7.750 08/15/22 1,026,050
475 Louisiana Pub Fac Auth Rev...................... 8.250 09/01/08 478,591
10,000 Orleans Parish, LA Sch Brd Rfdg................. * 02/01/15 2,407,600
1,000 Port New Orleans, LA Indl Dev................... 8.250 06/01/04 1,017,540
1,000 St Charles Parish, LA Pollutn Ctl Rev........... 8.250 06/01/14 1,042,450
1,400 West Feliciana Parish, LA Pollutn Ctl Rev....... 7.500 05/01/15 1,383,984
------------
11,057,239
------------
</TABLE>
12
<PAGE> 42
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
MAINE 0.3%
1,500 Maine Edl Ln Marketing Corp Student Ln
Rev Ser A4...................................... 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student
Ln Rev Ser A4................................... 5.600 11/01/00 1,955,140
------------
3,420,190
------------
MARYLAND 0.8%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem
Steel Corp Proj Ser A Rfdg...................... 7.550 06/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac Auth Rev
Kernan Hosp Issue............................... 6.100 07/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid Waste Rev
Montgomery Cnty Res Recovery Proj Ser A......... 6.200 07/01/10 2,706,960
1,165 Rockville, MD Mtg Rev Summit Apts Proj Ser A
Rfdg............................................ 5.625 07/01/19 989,353
------------
8,328,038
------------
MASSACHUSETTS 1.9%
1,000 Boston, MA Rev Boston City...................... 7.625 02/15/21 1,104,760
1,665 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser
A............................................... 7.000 01/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New
England Med Cent Hosp Ser G..................... 5.000 07/01/13 3,398,262
6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint
Mem Med Cent Ser A.............................. 5.750 10/01/06 4,272,000
1,000 Massachusetts St Hsg Multi Family............... 8.750 08/01/08 1,020,000
550 Massachusetts St Hsg Res Hsg.................... 8.400 08/01/21 562,375
1,000 Massachusetts St Indl 1st Mtg................... 8.625 10/01/23 968,870
1,000 Massachusetts St Indl Fin Agy................... 8.800 06/01/14 1,087,350
750 Massachusetts St Indl Fin Rev................... 7.100 11/15/18 673,387
2,000 Massachusetts St Wtr Res Ser.................... 7.500 04/01/16 2,189,060
2,000 Plymouth Cnty, MA Ctfs Partn Ser A.............. 7.000 04/01/22 2,005,280
------------
18,968,472
------------
MICHIGAN 1.5%
1,000 Detroit, MI Tax Incremnt 13..................... 7.600 07/01/10 1,014,280
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev
Munson Hlthcare Ser A Rfdg...................... 6.250 07/01/12 1,925,960
750 Michigan Pub Pwr Agy Rev........................ 7.000 01/01/18 770,002
1,000 Michigan St Hosp Fin Auth Rev................... 8.125 07/01/05 1,042,670
</TABLE>
13
<PAGE> 43
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
2,470 Michigan St Hosp Fin Auth Rev Garden City
Hosp............................................ 8.300 09/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B... 2.870 04/01/04 4,532,416
500 Monroe Cnty, MI Pollutn Ctl Rev................. 10.500 12/01/16 534,600
1,000 Mount Clemens, MI Corp Hsg...................... 6.600 06/01/13 971,950
2,390 Romulus, MI Cmnty Sch Rfdg...................... * 05/01/19 465,190
1,000 Royal Oak, MI Hosp Fin Auth..................... 6.750 01/01/20 970,680
------------
14,705,158
------------
MINNESOTA 0.8%
965 Minnesota St Hsg Fin Agy Single Family Mtg...... 6.750 01/01/26 912,648
1,000 North St Paul, MN Multi Family.................. 9.250 02/01/22 1,056,250
2,000 Southern MN Muni Pwr Agy Rev.................... 5.000 01/01/16 1,578,040
1,250 Southern MN Muni Pwr Agy Rev.................... 5.000 01/01/17 969,125
8,160 Southern MN Muni Pwr Agy Pwr Supply Sys
Rev Ser A....................................... * 01/01/22 1,351,949
2,500 St Paul, MN Port Auth Hsg Rev................... 9.500 12/01/11 2,393,750
------------
8,261,762
------------
MISSISSIPPI 0.6%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl
Rev Var Weyerhaeuser Co Rfdg.................... 6.560 04/01/22 4,706,600
1,155 Ridgeland, MS Urban Renewal..................... 7.750 12/01/15 1,073,999
------------
5,780,599
------------
MISSOURI 2.0%
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John
Knox Vlg Proj Rfdg & Impt....................... 7.125 08/15/12 2,001,660
1,890 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev.............................. 7.250 06/01/04 2,014,570
3,920 Missouri St Econ Dev Export & Infrastructure Brd
Med Office Fac Rev.............................. 7.250 06/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev
Hlth Midwest Ser B.............................. 6.250 02/15/22 3,790,200
1,000 Missouri St Hlth & Edl Fac Rev.................. 8.125 10/01/10 1,096,550
3,000 Missouri St Hlth & Edl Fac Rev Freeman Hosp Proj
Ser A........................................... 5.375 02/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home
Rev Mary Queen & Mother Proj Rfdg............... 7.125 03/20/23 2,213,258
1,000 St Louis, MO Pkg Fac Rev........................ 6.625 12/15/21 929,130
</TABLE>
14
<PAGE> 44
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
975 St Louis, MO Tax Increment Rev.................. 10.000 08/01/10 1,098,084
------------
19,954,119
------------
MONTANA 0.5%
6,000 Montana St Brd Invt Res Recovery Rev Yellowstone
Energy L P Proj................................. 7.000 12/31/19 5,373,240
------------
NEBRASKA 0.8%
5,200 Nebraska Invt Fin Auth Single Family Mtg Rev.... 9.963 09/19/23 4,998,500
850 Nebraska Invt Fin Auth Single Family Mtg Rev.... 9.293 09/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family Mtg Rev.... 10.542 09/10/30 1,892,250
------------
7,639,812
------------
NEVADA 1.8%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser
A............................................... 6.700 06/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp
Ser A........................................... 6.500 12/01/33 5,403,970
2,500 Henderson, NV Loc Impt Dist No T-4 Ser A........ 8.500 11/01/12 2,531,100
2,575 Humboldt Genl Hosp Dist NV...................... 6.125 06/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj
Ser E Rfdg...................................... 5.750 09/01/17 3,448,517
------------
17,637,235
------------
NEW HAMPSHIRE 0.9%
1,000 New Hampshire St Indl Dev Auth Rev.............. 10.750 10/01/12 1,142,260
1,000 New Hampshire St Indl Dev Auth Rev.............. 7.800 04/01/16 1,024,360
1,000 New Hampshire St Tpk Sys Rev Ser................ 6.750 11/01/11 1,016,990
2,500 New Hampshire Higher Edl & Hlth................. 8.500 01/01/15 2,689,200
2,000 New Hampshire Higher Edl & Hlth................. 7.625 07/01/16 1,860,880
1,000 New Hampshire St Bus Auth Pollutn Ctl........... 7.750 06/01/14 964,040
------------
8,697,730
------------
NEW JERSEY 2.3%
1,000 Camden Cnty, NJ Pollutn Ctl Ser................. 7.500 12/01/09 963,520
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A
Rfdg............................................ 8.448 08/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev
Ser A........................................... 5.800 07/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev
Ser A........................................... 5.800 07/01/08 1,918,720
3,200 New Jersey St Tpk Auth Rev Ser C................ 6.500 01/01/16 3,178,272
</TABLE>
15
<PAGE> 45
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj B Rfdg................... 6.250 06/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj C Rfdg................... 6.200 08/01/30 1,165,562
------------
23,504,883
------------
NEW MEXICO 0.4%
1,275 Albuquerque, NM Home Mtg Rev.................... 12.000 09/01/98 1,287,635
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San
Juan Regl Med Cent Inc Proj..................... 7.900 06/01/11 2,654,150
------------
3,941,785
------------
NEW YORK 13.0%
4,945 Battery Park City Auth NY Rev Sr Ser A Rfdg..... 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic Hosp Rev...... 8.000 01/01/20 3,583,155
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev
Burrows Paper Corp Recycling.................... 8.000 01/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter Fac Rev
Ser A........................................... 6.100 07/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac
Ser 5 Rfdg...................................... 7.000 07/01/12 5,025,350
1,500 Metropolitan Tran Auth NY Rev................... 5.500 07/01/15 1,286,700
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal
One Group Assn Proj............................. 6.000 01/01/19 4,355,000
1,000 New York City Muni Wtr Auth Rev................. 7.625 06/15/16 1,066,690
4,100 New York City Muni Wtr Auth Rev................. 5.000 06/15/17 3,155,401
3,000 New York City Muni Wtr Fin Auth................. 7.250 06/15/15 3,267,660
20,000 New York City Muni Wtr Fin Auth Wtr &
Swr Sys Rev..................................... 5.350 06/15/12 17,209,000
4,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys
Rev Ser B....................................... 5.625 06/15/11 3,520,600
2,500 New York City Ser B............................. 7.500 02/01/07 2,606,625
5,000 New York City Ser C Rfdg........................ 6.500 08/01/04 4,938,050
7,500 New York City Ser C Subser C-1.................. 7.500 08/01/20 7,692,225
5,000 New York City Ser H............................. 7.000 02/01/16 4,931,850
2,580 New York City Ser H Subser H-1.................. 4.900 08/01/97 2,505,232
1,000 New York, NY City Indl Dev A.................... 7.000 07/01/23 932,660
3,250 New York St Dorm Auth Rev....................... 7.700 05/15/12 3,615,820
1,000 New York St Dorm Auth Rev....................... 8.125 07/01/17 1,083,570
</TABLE>
16
<PAGE> 46
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
14,600 New York St Dorm Auth Rev City Univ 3rd Genl
Resources Ser E................................. 6.750 07/01/24 14,634,635
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev.. 8.041 04/01/20 1,990,625
2,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev Niagara Mohawk Pwr Corp Ser A Rfdg.......... 7.200 07/01/29 2,072,800
7,000 New York St Energy Resh & Dev Auth Pollutn Ctl
Rev NY St Elec & Gas Corp Ser A Rfdg............ 6.050 04/01/34 6,371,120
1,000 New York St Environmental Fac Rev............... 10.000 10/01/17 1,097,130
490 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser A............................. 7.750 08/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Impt Ser A............................. 7.750 08/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Ser C.................................. 7.300 02/15/21 499,658
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth
Svcs Fac Ser C.................................. 7.300 02/15/21 1,663,085
1,965 New York St Med Care Fac........................ 7.250 02/15/09 2,067,966
1,000 New York St Med Care Fac........................ 8.000 02/15/25 1,083,470
1,000 New York St Med Care Fac Rev.................... 7.400 02/15/19 1,008,700
2,500 New York St Pwr Auth Rev........................ 7.375 01/01/18 2,603,075
5,000 New York St Urban Dev Corp Rev Correctional Cap
Fac Ser A Rfdg.................................. 6.500 01/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St Fac........... 7.500 04/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy Rev Proj Res
Recovery Fac.................................... 6.875 05/01/06 2,920,380
1,000 Port Auth NY & NJ Cons.......................... 6.125 07/15/22 918,130
1,000 Triborough Brog & Tunl Auth..................... 7.875 01/01/18 1,081,280
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy
Proj............................................ 8.000 03/15/22 1,021,980
------------
130,027,643
------------
NORTH CAROLINA 1.3%
335 North Carolina Eastern Muni Pwr................. 8.000 01/01/21 363,391
2,665 North Carolina Eastern Muni Pwr................. 8.000 01/01/21 2,890,858
7,695 North Carolina Eastern Muni Pwr................. 4.500 01/01/24 5,724,772
2,850 North Carolina Muni Pwr Rev..................... 7.875 01/01/19 3,081,420
1,000 North Carolina Muni Pwr Rev..................... 6.000 01/01/20 864,850
------------
12,925,291
------------
</TABLE>
17
<PAGE> 47
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
NORTH DAKOTA 0.3%
1,240 Mercer Cnty, ND Pollutn Ctl Rev Ser............. 7.000 01/01/19 1,195,434
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's
Hosp Corp Proj.................................. 8.875 11/15/24 2,022,540
------------
3,217,974
------------
OHIO 1.8%
500 Cleveland, OH Pkg Fac Rev....................... 8.000 09/15/12 505,950
750 Coshocton Cnty, OH Solid Waste Disp............. 7.875 08/01/13 721,680
1,000 Cuyahoga Cnty, OH Hlthcare...................... 7.300 11/15/23 893,870
500 Fairfield, OH Econ Dev Rev...................... 8.500 01/01/03 512,495
4,660 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys
Ser B Rfdg...................................... 5.250 06/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B.... 9.213 03/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG Fdg Ltd
Partnership Proj Rfdg........................... 6.375 04/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College
Cleveland Elec Ser A Rfdg....................... 8.000 10/01/23 1,962,140
------------
17,829,135
------------
OKLAHOMA 1.4%
9,685 Grand River Dam Auth Okla Rev................... 5.000 06/01/12 7,861,023
2,810 Oklahoma Hsg Fin Agy Single Family Rev Mtg
Class B......................................... 7.997 08/01/18 3,034,800
800 Tulsa, OK Muni Arpt Tr Rev...................... 9.500 06/01/20 836,680
1,000 Tulsa, OK Muni Arpt Tr Rev...................... 7.600 12/01/30 928,650
1,500 Woodward, OK Muni Auth Rev...................... 8.000 11/01/12 1,613,190
------------
14,274,343
------------
OREGON 0.0%
500 Salem, OR Hosp Fac Auth......................... 7.500 12/01/24 476,030
------------
PENNSYLVANIA 3.8%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart
Hosp Ser A Rfdg................................. 6.750 11/15/14 2,613,420
2,000 Butler Cnty Indl Dev Auth 1st Mtg Rev........... 8.750 06/01/16 2,098,380
500 Chartiers Valley, PA Indl....................... 7.250 12/01/11 488,085
500 Chartiers Valley, PA Indl....................... 7.400 12/01/15 488,030
995 Clearfield Hosp Auth Ser 94..................... 6.875 06/01/16 916,713
</TABLE>
18
<PAGE> 48
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp
Crozer-Chester Mem Cent......................... 6.000 12/15/20 1,587,840
1,500 Delaware Cnty, PA Indl Dev Auth Rev............. 8.100 12/01/13 1,590,495
2,000 Delaware St Econ Dev Auth Ser A................. 6.900 01/01/18 1,740,220
1,750 Emmaus, PA Gen Auth Rev......................... 8.150 05/15/18 1,864,327
2,500 Emmaus, PA Gen Auth Rev Ser C................... 7.900 05/15/18 2,644,475
500 Erie Cnty, PA Hosp Auth Rev..................... 7.250 07/01/12 491,745
845 Lebanon Cnty, PA Good Samaritan................. 5.850 11/15/07 739,915
1,000 Lebanon Cnty, PA Hlth Fac....................... 6.750 10/01/10 946,180
1,000 Lehigh Cnty, PA Indl Dev Auth................... 8.000 08/01/12 974,190
1,315 Luzerne Cnty, PA Indl Dev Ser................... 7.875 12/01/13 1,285,833
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford
Hosp Proj....................................... 8.875 10/01/20 1,734,660
1,000 Mckeesport, PA Hosp Auth Rev.................... 6.500 07/01/08 932,030
1,000 Montgomery Cnty, PA Indl Dev Rev................ 7.500 01/01/12 1,030,240
1,000 Montgomery Cnty, PA Indl Dev Auth............... 6.300 01/01/13 863,960
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth
Hosp Rev........................................ 5.660 06/01/12 2,588,940
500 Pennsylvania St Higher Edl Fac Rev.............. 7.200 07/01/19 514,060
250 Pennsylvania St Higher Edl Rev.................. 7.500 03/01/14 253,250
1,000 Philadelphia, PA Auth Indl Rev.................. 6.125 02/15/03 961,600
725 Philadelphia, PA Hosp & Higher.................. 7.250 03/01/24 637,449
2,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp
Rev Temple Univ Hosp Ser A...................... 6.500 11/15/08 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease Ser B
Rfdg............................................ 6.400 11/15/16 870,416
500 Scranton-Lackawanna, PA Rev..................... 8.250 07/01/09 522,305
1,000 Scranton-Lackawanna, PA Ser A................... 7.375 07/15/08 961,960
2,330 Somerset Cnty, PA Gen Auth...................... 6.250 10/15/11 2,385,290
1,000 Washington Cnty, PA Hosp Auth................... 7.350 06/01/13 909,290
------------
37,508,518
------------
RHODE ISLAND 0.9%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A....... 8.000 09/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn Corp Spl
Oblig Ser A..................................... 6.950 08/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm
Ser B........................................... 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A.......................... 6.800 07/15/98 2,507,501
</TABLE>
19
<PAGE> 49
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
600 West Warwick, RI Ser A.......................... 7.300 07/15/08 604,374
------------
9,127,037
------------
SOUTH CAROLINA 0.2%
1,070 Piedmont Muni Pwr Agy Rev....................... 5.000 01/01/25 790,451
140 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 146,238
210 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 219,357
650 South Carolina Pub Svcs Rfdg.................... 7.875 07/01/21 669,617
------------
1,825,663
------------
SOUTH DAKOTA 0.4%
150 South Dakota St Hlth Auth Rev................... 7.625 11/01/13 157,111
1,850 South Dakota St Hlth Auth Rev................... 7.625 11/01/13 2,012,485
1,000 South Dakota St Hlth Auth Rev................... 7.250 04/01/20 933,720
1,000 South Dakota St Hsg Dev Auth.................... 6.850 05/01/26 981,250
------------
4,084,566
------------
TENNESSEE 0.3%
500 Clarksville, TN Hosp Rev........................ 6.250 07/01/13 440,725
1,500 Maury Cnty, TN Indl Dev Brd Pollutn Ctl Rev
Multi Modal Saturn Corp Proj Rfdg............... 6.500 09/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth Spl Fac & Proj
Rev Federal Express Corp Rfdg................... 7.875 09/01/09 1,592,235
------------
3,417,670
------------
TEXAS 7.6%
1,000 Austin, TX Hsg Fin Corp......................... 6.750 04/01/19 928,140
1,250 Austin, TX Util Sys Rev......................... 7.750 11/15/06 1,314,612
1,000 Austin, TX Util Sys Rev Ser..................... 7.800 11/15/12 1,094,670
2,380 Austin, TX Util Sys Rev Ser..................... 7.800 11/15/12 2,584,442
2,280 Austin, TX Util Sys Rev......................... 6.000 05/15/15 2,089,597
1,500 Bexar Cnty, TX Hlth Fac Dev..................... 7.900 05/01/18 1,538,325
500 Bexar Cnty, TX Hlth Fac Dev..................... 7.000 05/01/21 480,800
435 Bexar Cnty, TX Hsg Corp Rev..................... 9.250 04/01/16 448,110
410 Bexar Cnty, TX Hsg Corp Rev..................... 8.200 04/01/22 422,295
3,675 Brazos River Auth TX Pollutn Ctl Rev............ 9.875 10/01/17 4,012,401
1,595 Capital Indl Dev Corp TX PC..................... 7.400 05/01/12 1,702,917
625 Clear Creek, TX Indpt Sch Dist.................. 6.250 02/01/11 638,568
940 Dallas-Ft Worth Intl Arpt....................... 7.500 11/01/25 873,241
135 El Paso, TX Ppty Fin Auth Inc................... 8.700 12/01/18 140,805
</TABLE>
20
<PAGE> 50
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
500 Eldridge Rd Util Dist TX Rfdg................... 6.125 03/01/11 446,210
500 Fort Bend Cnty, TX Levee #11.................... 8.700 03/01/09 536,905
440 Fort Bend Cnty, TX Levee #11.................... 8.700 03/01/10 472,639
680 Fort Worth, TX Hsg Fin Rfdg..................... 8.500 10/01/11 725,349
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow
Freight Sys Inc Proj............................ 8.000 12/01/16 2,605,475
785 Harris Cnty, TX Hsg Fin Single Family Mtg....... 10.125 07/15/03 779,646
1,000 Harris Cnty, TX Hth Fac Dev..................... 7.125 06/01/15 1,020,520
500 Harris Cnty, TX Muni Util G O................... 7.300 03/01/14 478,125
1,000 Harris Cnty, TX Util Dist #1.................... 9.750 03/01/00 1,008,370
855 Houston, TX Hsg Fin Corp Rev.................... 5.950 12/01/10 791,969
675 Houston, TX Hsg Fin Single Family Mtg Rev....... 10.000 09/15/14 686,805
1,160 Jefferson Cnty, TX Hlth Fac..................... 8.300 10/01/14 1,233,706
3,995 Leander, TX Indpt Sch Dist Cap Apprec Rfdg...... * 08/15/16 853,652
1,000 Mills Rd Muni Util Dist TX...................... 6.500 09/01/14 902,600
500 Mission Bend Muni Util Dist 2................... 10.000 09/01/98 560,210
375 Mission Bend Muni Util Dist 2................... 10.000 09/01/00 426,907
655 Montgomery Cnty, TX Muni Util Dist.............. 8.900 09/01/02 727,547
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C
Presbyterian Hlthcare Sys....................... 10.655 06/22/21 3,364,375
500 North Mission Glen Muni Util.................... 6.500 09/01/14 448,460
750 Northwest Harris Cnty Util...................... 8.100 10/01/15 784,522
1,500 Richardson, TX Hosp Auth Rev.................... 6.750 12/01/23 1,390,935
1,750 Rusk Cnty, TX Hlth Fac Cor...................... 7.750 04/01/13 1,708,035
440 Sabine River Auth, TX Pollutn Ctl Rev........... 9.000 09/01/07 475,824
1,350 Sabine River Auth, TX Pollutn Ctl Rev........... 7.750 04/01/16 1,400,490
1,000 Sam Rayburn, TX Muni Pwr Agy.................... 6.750 10/01/14 915,530
1,000 Sam Rayburn, TX Muni Pwr Agy.................... 6.250 10/01/17 837,830
500 Texas Gen Svcs Commn Partn I.................... 7.000 08/01/19 479,635
500 Texas Gen Svcs Commn Partn I.................... 7.000 08/01/24 478,380
8,565 Texas Muni Pwr Agy Rev.......................... 5.500 09/01/13 7,412,750
13,000 Texas Muni Pwr Agy Rev.......................... * 09/01/13 3,785,340
3,954 Texas St........................................ 6.350 12/01/13 3,888,447
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev
Coll Ser C Rfdg................................. 9.207 07/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd
College Student Ln.............................. 0/7.850 10/01/25 2,391,494
1,000 Texas St Superconducting Ser.................... 5.500 04/01/20 831,500
</TABLE>
21
<PAGE> 51
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
1,450 Texas St Veterans Hsg........................... 6.800 12/01/23 1,437,211
245 Travis Cnty, TX Hsg Fin Single Family Mtg....... 8.200 04/01/22 247,207
1,000 Tyler, TX Hlth Fac Dev Ser B.................... 6.750 11/01/25 888,890
1,000 Weslaco, TX Hlth Fac Dev Ser.................... 5.250 06/01/16 818,660
2,250 West Side Calhoun Cnty, TX Navig Dist Solid
Waste Disp Union Carbide Chem & Plastics........ 8.200 03/15/21 2,365,897
500 Willow Fork Drain Dist TX....................... 7.000 03/01/12 496,975
500 Willow Fork Drain Dist TX....................... 7.000 03/01/13 491,370
1,000 Winters, TX Wtrwks & Swr Rev.................... 8.500 08/01/17 1,164,310
------------
75,820,250
------------
UTAH 2.9%
3,215 Bountiful, UT Hosp Rev South Davis Cmnty
Hosp Proj....................................... 9.500 12/15/18 3,271,070
2,400 Intermountain Pwr Agy UT Rev.................... 7.750 07/01/17 2,531,088
3,650 Intermountain Pwr Agy UT Rev.................... 7.750 07/01/20 3,876,336
2,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/21 1,766,940
2,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/21 1,766,940
1,000 Intermountain Pwr Agy UT Rev.................... 6.000 07/01/23 880,570
1,850 Intermountain Pwr Agy UT Spl Oblig.............. 5.000 07/01/16 1,455,561
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg... 6.150 02/15/12 9,668,560
1,000 Utah St Bldg Ownership Auth..................... 7.800 08/15/10 1,073,890
1,300 Utah St Bldg Ownership Auth..................... 7.800 08/15/11 1,396,057
1,000 Utah St Hsg Fin Agy Single Family Mtg Ser F2.... 7.000 07/01/27 1,001,560
------------
28,688,572
------------
VIRGIN ISLANDS 0.2%
500 University Virgin Islands....................... 7.500 10/01/09 494,215
500 University Virgin Islands....................... 7.650 10/01/14 489,950
785 Virgin Islands Port Auth Rev.................... 10.125 11/01/05 811,901
------------
1,796,066
------------
VIRGINIA 1.3%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp Rev......... 5.500 09/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev... 6.600 08/15/23 3,403,330
2,080 Loudoun Cnty, VA Ctfs Partn..................... 6.800 03/01/14 2,102,423
1,000 Loudoun Cnty, VA Ctfs Partn..................... 6.900 03/01/19 1,011,500
</TABLE>
22
<PAGE> 52
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
3,535 Norfolk, VA Wtr Rev............................. 5.250 11/01/13 3,038,014
1,250 Southeastern Pub Svcs Auth VA Rev Sr Regl Solid
Waste Sys....................................... 6.000 07/01/17 1,100,425
1,250 Virginia Port Auth Comwlth...................... 8.200 07/01/08 1,349,875
------------
12,870,227
------------
WASHINGTON 1.1%
1,000 Lewis Cnty, WA Pub Util #0...................... 6.000 10/01/24 890,210
2,000 Washington St Pub Pwr #2 199.................... 7.625 07/01/10 2,208,540
445 Washington St Pub Pwr Rev....................... 15.000 07/01/17 519,479
1,000 Washington St Pub Pwr Rev #2.................... 7.375 07/01/12 1,091,620
3,000 Washington St Pub Pwr Rev #3.................... 5.600 07/01/17 2,524,590
2,500 Washington St Pub Pwr Rev Ser B................. 7.000 07/01/12 2,501,425
1,250 Washington St Pub Pwr Rev Ser B................. 7.125 07/01/16 1,256,850
------------
10,992,714
------------
WEST VIRGINIA 1.0%
2,500 Harrison Cnty, WV Cnty Comm Solid Waste Disp
Rev Monongahela Pwr Co.......................... 6.875 04/15/22 2,449,900
6,750 South Charleston, WV Indl Dev Rev Union Carbide
Chem & Plastics Ser A........................... 8.000 08/01/20 7,020,810
1,000 West Virginia Hosp Fin Auth..................... 6.750 03/01/14 909,180
------------
10,379,890
------------
WISCONSIN 0.7%
750 Jefferson, WI Sew Sys Wtrwks.................... 7.400 07/01/16 813,397
3,200 Wisconsin Hsg & Econ Dev Auth Home Ownership
Rev Rfdg........................................ 9.580 10/25/22 3,008,000
1,000 Wisconsin St Hlth & Edl Fac Rev................. 8.500 03/01/19 1,040,680
2,000 Wisconsin St Hlth & Edl Rev..................... 8.200 08/15/18 2,206,560
------------
7,068,637
------------
</TABLE>
23
<PAGE> 53
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
PRO FORMA PORTFOLIO OF INVESTMENTS -- CONTINUED
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
PAR
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
<C> <S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
WYOMING 0.2%
2,000 Sweetwater Cnty, WY Solid Waste Disp Rev FMC
Corp Proj Ser B................................. 6.900 09/01/24 1,842,220
------------
TOTAL LONG-TERM INVESTMENTS 97.7%.................................................. 975,776,053
SHORT-TERM INVESTMENTS 0.9%........................................................ 9,440,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%......................................... 13,703,864
------------
NET ASSETS 100%.................................................................... $998,919,917
===========
</TABLE>
*Zero coupon bond
24
<PAGE> 54
APPENDIX A
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
[TO COME]
A-1
<PAGE> 55
APPENDIX B
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
[TO COME]
B-1
<PAGE> 56
Appendix C
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO
September 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 94.9%
Education 4.5%
$ 1,000,000 Broward County, Florida, Educational Facilities Authority Rev.
(Nova University Project), G.O., 8.50%, 4/1/10 . . . . . . . . . . . . . . . . . . $ 1,148,150
625,000 Clear Creek, Texas, Independent School District, G.O.,
6.25%, 2/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654,156
1,000,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07 . . . . . . . . . . . . . . . . 1,229,150
1,150,000 Florida State Board of Education, Capital
Outlay, Series A, 7.25%, 6/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,564
Illinois Educational Facilities Authority Rev., G.O.
1,000,000 Lake First College, FSA, 6.75%, 10/1/21 . . . . . . . . . . . . . . . . . . . . . 1,020,930
1,000,000 Northwestern University, Series 1985, 6.90%, 12/1/21 . . . . . . . . . . . . . . . 1,103,630
2,000,000 New Hampshire Higher Education & Daniel Webster College Issue, G.O.,
7.625%, 7/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900,260
1,000,000 New York City, New York, Industrial Development Agency, Civil Facility
Rev. (Marymount Manhattan College Project), G.O., 7.00%, 7/1/23 . . . . . . . . . 953,620
New York State Dormitory Authority Rev.
1,000,000 City University, 8.125%, 7/1/17; Pre-refunded 7/1/97 . . . . . . . . . . . . . . . 1,104,280
3,250,000 State University Educational Facility, Series 1990-A, 7.70%, 5/15/12 . . . . . . . 3,703,960
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, MBIA, G.O., 7.20%, 7/1/19 . . . . . . . . . . . . . 538,005
250,000 Pennsylvania Medical College, Series A, G.O., 7.50%, 3/1/14 . . . . . . . . . . . 254,850
University of the Virgin Islands, Series A
500,000 7.50%, 10/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,335
500,000 7.65%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496,965
--------------
TOTAL EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,866,855
--------------
HEALTH CARE 1.7%
500,000 Colorado Health Facilities Authority Rev. (Cleo Wallace Center Project),
7.00%, 8/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,925
1,500,000 Colorado Health Facilities Authority Rev. (PSL Healthcare System
Project), Series 1991-A, FSA, 6.25%, 2/15/21 . . . . . . . . . . . . . . . . . . . 1,460,220
1,000,000 Cuyahoga County, Ohio, Health Care Facilities Rev.
(Jennings Hall), 7.30%, 11/15/23 . . . . . . . . . . . . . . . . . . . . . . . . . 941,580
1,000,000 Lebanon County, Pennsylvania, Health Facilities Authority Health
Center Rev. (UTD Church of Christ Homes Project), 6.75%, 10/1/10 . . . . . . . . . 969,620
750,000 Massachusetts State, Industrial Finance Rev., 7.10%, 11/15/18 . . . . . . . . . . . . 688,673
235,000 Pinal County, Arizona, Industrial Development Authority (Casa
Grande Regional Medical Center Project), 9.00%, 12/1/13 . . . . . . . . . . . . . 239,991
1,000,000 St. Petersburg, Florida, Health Facilities Authority Rev. (Allegany
Health Systems), 7.75%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . 1,130,990
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,912,999
--------------
HOSPITALS 14.6%
Bexar County, Texas, Health Facilities Development Rev. (St. Lukes
Lutheran Hospital Project)
500,000 7.00%, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495,785
1,500,000 7.90%, 5/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,564,290
1,000,000 Boston, Massachusetts, Rev. (Boston City Hospital), FHA, 7.625%, 2/15/21 . . . . . . 1,132,060
500,000 Boulder County, Colorado, Industrial Development Rev. (Boulder Medical
Center Project), 8.875%, 1/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 519,905
</TABLE>
C-1
<PAGE> 57
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-CONTINUED
$ 1,000,000 Charlotte County, Florida, Hospital Authority Rev. (Bon Secours
Health System), 8.25%, 8/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,128,880
500,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement
(Clarksville Memorial Project), 6.25%, 7/1/13 . . . . . . . . . . . . . . . . . . . 458,670
995,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project), Series-94, 6.875%, 6/1/16 . . . . . . . . . . . . . . . . . . . 903,619
800,000 Colorado Health Facilities Authority Rev. (Rocky Mountain
Adventist), 6.625%, 2/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747,680
2,000,000 Delaware State Economic Development Authority Rev. (Osteopathic
Hospital Association of Delaware), Series A, 6.90%, 1/1/18 . . . . . . . . . . . . 1,823,740
1,000,000 Ector County, Texas, Hospital District (Medical Center Hospital),
7.125%, 4/15/02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012,720
500,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health
Center), Series 1992, 7.25%, 7/1/12 . . . . . . . . . . . . . . . . . . . . . . . 506,535
1,000,000 Harris County, Texas, Health Facilities Development Corp.
(Memorial Hospital System Project), 7.125%, 6/1/15 . . . . . . . . . . . . . . . . 1,039,500
Illinois Health Facilities Authority Rev.
1,000,000 Elmhurst Memorial Hospital, Series 87-A, 8.125%, 1/1/13 . . . . . . . . . . . . . 1,086,380
1,000,000 Improvement Swedish Covenant, Series A, 6.30%, 8/1/13 . . . . . . . . . . . . . . 915,540
2,000,000 Lutheran Health System, Series B, MBIA, 6.00%, 4/1/18 . . . . . . . . . . . . . . 1,868,980
1,000,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19 . . . . . . . . . . . . . . 1,125,770
1,000,000 Memorial Hospital, 7.25%, 5/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . 977,770
500,000 Mercy Center For Health Care Services, 6.625%, 10/1/12 . . . . . . . . . . . . . . 492,770
1,000,000 Northwestern Memorial Hospital, 6.75%, 8/15/11 . . . . . . . . . . . . . . . . . . 1,028,770
1,000,000 Indiana Health Facilities, Financing Hospital Authority Rev.
(Community Hospital of Indiana), Series-H, MBIA, 6.85%, 7/1/22 . . . . . . . . . . 1,020,510
1,160,000 Jefferson County, Texas, Health Facility Authority Rev. (Baptist
Health Care Project), 8.30%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . 1,249,355
845,000 Lebanon County, Pennsylvania, Good Samaritan Hospital Authority
Rev. (Good Samaritan Hospital Project), 5.85%, 11/15/07 . . . . . . . . . . . . . 762,367
1,000,000 Marion County, Indiana, Hospital Authority, Facility Rev.
(Methodist Hospital of Indiana), 6.50%, 9/1/13 . . . . . . . . . . . . . . . . . . 973,060
1,000,000 McKeesport, Pennsylvania, Hospital Authority Rev. (McKeesport
Hospital Project), 6.50%, 7/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . 924,620
1,000,000 Michigan State Hospital Finance Authority Rev. (St. Joseph
Hospital Corp.), Series A, 8.125%, 7/1/05 . . . . . . . . . . . . . . . . . . . . 1,053,220
1,000,000 Missouri State Health & Educational Facilities Authority
(Heartland Health Systems Project), 8.125%, 10/1/10 . . . . . . . . . . . . . . . 1,122,930
2,500,000 New Hampshire Health & Higher Educational Facility Authority Rev.
(Wentworth Douglass Hospital), 8.50%, 1/1/15 . . . . . . . . . . . . . . . . . . . 2,735,975
New York State Medical Care Facilities Finance Agency Rev.
1,000,000 Columbia Presbyterian Hospital, Series A, FHA, 8.00%, 2/15/25 . . . . . . . . . . 1,104,630
1,965,000 Montefiore Medical Center, 7.25%, 2/15/09 . . . . . . . . . . . . . . . . . . . . . 2,096,262
1,000,000 North General Hospital, Series 89-A, 7.40%, 2/15/19 . . . . . . . . . . . . . . . . 1,040,740
725,000 Philadelphia, Pennsylvania, Hospital & Higher Education Facilities
Authority Rev. (Roxborough Memorial Hospital), Series 2, 7.25%, 3/1/24 . . . . . . 658,445
1,500,000 Richardson, Texas, Hospital Authority, Refunding & Improvement
Rev. (Richardson Medical Center), 6.75%, 12/1/23 . . . . . . . . . . . . . . . . . 1,416,225
1,000,000 Royal Oak, Michigan, Hospital Finance Authority, Rev. (William
Beaumont Hospital), Series D, 6.75%, 1/1/20 . . . . . . . . . . . . . . . . . . . 1,006,770
1,750,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project), 7.75%, 4/1/13 . . . . . . . . . . . . . . . 1,693,405
</TABLE>
C-2
<PAGE> 58
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS CONTINUED
$ 500,000 Salem, Oregon, Hospitals Facilities Authority Rev., 7.50%, 12/1/24 . . . . . . . . . $ 493,455
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority
Rev. (Moses Taylor Hospital Project)
1,000,000 Series A, 7.375%, 7/15/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 983,730
500,000 Series B, 8.25%, 7/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534,570
South Dakota State Health & Educational Facilities Authority Rev.
(Sioux Valley Hospital)
1,000,000 7.25%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,700
2,000,000 7.625%, 11/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,216,063
1,500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA, 6.25%, 8/15/22 . . . . . . . . . . . . . . . . 1,449,990
1,000,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health), Series B, 6.75%, 11/1/25 . . . . . . . . . . . . 914,870
1,000,000 Washington County, Pennsylvania, Hospital Authority, 7.35%, 6/1/13 . . . . . . . . . 941,050
1,500,000 Wells County, Indiana, Hospital Authority Rev., Refunding
(Caylor-Nickel Medical Center, Inc.), 8.50%, 4/15/03 . . . . . . . . . . . . . . . 1,517,085
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical
Center Project), Series-A, 5.25%, 6/1/16 . . . . . . . . . . . . . . . . . . . . . 848,500
1,000,000 West Virginia State, Hospital Finance Authority, Refunding &
Improvement (Fairmont General Hospital), Series A, 6.75%, 3/1/14 . . . . . . . . . 946,270
2,000,000 Wisconsin State Health & Educational Facilities Rev. (Wheaton
Franciscan Services Inc.), 8.20%, 8/15/18 . . . . . . . . . . . . . . . . . . . . 2,254,280
--------------
TOTAL HOSPITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,746,441
--------------
HOUSING 6.2%
1,275,000 Albuquerque, New Mexico, Home Mtg. Rev., 12.00%, 9/1/98 . . . . . . . . . . . . . . . 1,261,536
1,645,000 Arapahoe County, Colorado, Single Family Mtg. Rev., 8.375%, 8/1/19 . . . . . . . . . 1,697,311
1,000,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project), 6.75%, 4/1/19 . . . . . . . . . . . . . . . . 965,230
Bexar County, Texas, Housing Finance Corp., Rev.
410,000 8.20%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430,791
435,000 Series B, 9.25%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455,692
145,000 El Paso, Texas, Property Finance Authority Inc., Single Family
Mtg. Rev., Series A, 8.70%, 12/1/18 . . . . . . . . . . . . . . . . . . . . . . . 154,960
680,000 Fort Worth, Texas, Housing Finance Corp., Home Mtg. Rev.,
Refunding, 8.50%, 10/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724,315
800,000 Harris County, Texas, Housing Financing Corp., Single Family Mtg.
Rev., Series 1983-A, 10.125%, 7/15/03 . . . . . . . . . . . . . . . . . . . . . . 802,592
Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.
705,000 10.00%, 9/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725,057
885,000 Series A, FSA, 5.95%, 12/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . 866,937
1,000,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding
(Laguna Point Apartments Project), 6.50%, 7/1/09 . . . . . . . . . . . . . . . . . 994,250
Massachusetts State Housing Finance Agency
1,000,000 Multi-family Housing Authority, Series A, 8.75%, 8/1/08 . . . . . . . . . . . . . 1,041,250
550,000 Residential Housing Authority, Series A, 8.40%, 8/1/21 . . . . . . . . . . . . . . 573,375
965,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev., 6.75%, 1/1/26 . . . 956,556
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Retirement Community Rev. (GDL Farms Corp. Project), 6.30%, 1/1/13 . . 895,260
</TABLE>
C-3
<PAGE> 59
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING-CONTINUED
$ 1,000,000 Mount Clemens, Michigan, Housing Corp., Multi-family Rev., Refunding,
Series A, 6.60%, 6/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000,640
1,000,000 North St. Paul, Minnesota, Multi-family Refunding Housing Rev.
(Cottages North St. Paul), 9.25%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . 1,078,020
1,000,000 Pima County, Arizona, IDR, Single Family Mtg. Rev., 6.625%, 11/1/14 . . . . . . . . . 1,000,720
1,155,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project), Series A,
7.75%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,120,997
2,500,000 St. Paul, Minnesota Port Authority, Housing & Redevelopment
Authority, Multi-family Housing Rev., Series J, 9.50%, 12/1/11 . . . . . . . . . . 2,375,525
1,000,000 South Dakota State Housing Development Authority, Homeowner
Mtg., Series D-1, 6.85%, 5/1/26 . . . . . . . . . . . . . . . . . . . . . . . . . 1,013,750
1,450,000 Texas State Veterans Housing Assistance, MBIA, G.O., 6.80%, 12/1/23 . . . . . . . . . 1,471,344
245,000 Travis County, Texas, Housing Finance Corp., Single Family Mtg. Rev., 8.20%, 4/1/22 . 252,073
--------------
TOTAL HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,858,181
--------------
LIFE CARE 1.6%
2,000,000 Butler County, Pennsylvania, Industrial Development Authority Rev.,
1st Mtg. Rev. (Sherwood Oaks Project), Series A, 8.75%, 6/1/16 . . . . . . . . . . 2,119,800
975,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project), 9.25%, 12/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,013,454
1,000,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
(Reeds Landing Project), 8.625%, 10/1/23 . . . . . . . . . . . . . . . . . . . . . 1,001,470
500,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple), Series-A, 6.75%, 12/1/13 . . . . . . . . . . . . . . 445,875
1,000,000 Wisconsin State Health & Educational Facilities Authority Rev.
(United Lutheran Program for the Aging Inc. Project), 8.50%, 3/1/19 . . . . . . . 1,056,780
--------------
TOTAL LIFE CARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,637,379
--------------
MISCELLANEOUS 7.4%
500,000 Berry Creek Metropolitan District, Colorado, G.O.,
Refunding and Improvement, 8.25%, 12/1/11 . . . . . . . . . . . . . . . . . . . . 529,345
2,000,000 Compton, California, Certificates of Participation, Refunding,
Series B, 7.50%, 8/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100,760
1,000,000 Detroit, Michigan, Tax Increment Bonds (Development Area No. 1
Project), Series 89-A, 7.60%, 7/1/10 . . . . . . . . . . . . . . . . . . . . . . . 1,047,540
2,500,000 District of Columbia Rev. (National Public Radio), Series A, 7.70%, 1/1/23 . . . . . 2,485,300
1,000,000 Dove Valley Metropolitan District, Arapahoe County, Colorado, G.O., 9.50%, 12/1/08 . 1,026,910
1,000,000 Du Page County, Illinois (Stormwater Project), 6.55%, 1/1/21 . . . . . . . . . . . . 1,077,360
Fort Bend County, Texas, Levee Improvement District No. 11, G.O.
500,000 8.70%, 3/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,620
440,000 8.70%, 3/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,441
1,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project), 7.75%, 8/15/22 . . . . . . . . . . 1,043,160
1,000,000 Lehigh County, Pennsylvania, IDR (Allentown Interstate Motel), 8.00%, 8/1/12 . . . . 995,130
Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series 1992, G.O.
630,000 7.95%, 12/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643,432
500,000 8.10%, 12/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525,640
</TABLE>
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AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS CONTINUED
$ 145,000 Pocahontas, Iowa, Industrial Development Rev. (Navistar
International Harvester Co.), 10.25%, 10/1/00 . . . . . . . . . . . . . . . . . . $ 150,690
1,000,000 Port of New Orleans, Louisiana, IDR, Refunding (Avondale
Industries, Inc.), 8.25%, 6/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . 1,038,230
2,330,000 Somerset County, Pennsylvania, General Authority, Commonwealth
Lease Rev., FGIC, 6.25%, 10/15/11 . . . . . . . . . . . . . . . . . . . . . . . . 2,448,830
1,750,000 St. Charles, Illinois, Industrial Development Rev. (Tri-City Center
Project), 7.50%, 11/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,693,090
Texas General Services, Community Partner Interests, (Office
Building and Land Acquisition Project)
500,000 7.00%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,875
500,000 7.00%, 8/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,130
1,000,000 Texas State, Refunding (Superconducting Project), Series C, G.O.,
5.50%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 864,050
Utah State Building Ownership Authority Lease Rev. (Dept. of
Employment Security)
1,000,000 7.80%, 8/15/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,096,710
1,300,000 7.80%, 8/15/11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,425,723
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline), 7.125%, 12/1/25 . . . 1,056,150
1,250,000 Virginia, Port of Authority, Commonwealth, 8.20%, 7/1/08 . . . . . . . . . . . . . . 1,372,988
1,500,000 Woodward, Oklahoma, Municipal Auto Sales, Refunding, 8.00%, 11/1/12 . . . . . . . . . 1,645,860
--------------
TOTAL MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,265,964
--------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.4%
500,000 Eldridge Road, Texas, MUD, Refunding, 6.125%, 3/1/11 . . . . . . . . . . . . . . . . 452,450
1,000,000 Harris County, Texas, MUD No. 1, 9.75%, 3/1/00; Pre-refunded 3/1/95 . . . . . . . . . 1,022,650
500,000 Harris County, Texas, MUD, Refunding, G.O., 7.30%, 3/1/14 . . . . . . . . . . . . . . 490,815
1,000,000 Mills Road, Texas, MUD, 6.50%, 9/1/14 . . . . . . . . . . . . . . . . . . . . . . . . 927,450
Mission Bend MUD No. 2, Texas
500,000 10.00%, 9/1/98 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 567,770
375,000 10.00%, 9/1/00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,881
655,000 Montgomery County, Texas, MUD No. 4 (Water Works System), 8.90%, 9/1/02 . . . . . . . 744,362
500,000 North Mission Glen, Texas, MUD, Refunding, 6.50%, 9/1/14 . . . . . . . . . . . . . . 460,755
--------------
TOTAL MUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,099,133
--------------
NURSING HOMES 0.6%
500,000 Fairfield, Ohio, Economic Development Rev., Refunding
(Beverly Enterprises), 8.50%, 1/1/03 . . . . . . . . . . . . . . . . . . . . . . . 523,690
475,000 Louisiana Public Facilities Authority, Industrial Development Rev.,
Refunding (Beverly Enterprises), 8.25%, 9/1/08 . . . . . . . . . . . . . . . . . . 490,822
1,315,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project),
Series-A, 7.875%, 12/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,270,724
--------------
TOTAL NURSING HOMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,285,236
--------------
POLLUTION CONTROL REVENUE (PCR) 6.1%
3,675,000 Brazos River Authority, Texas, PCR (Texas Utilities Electric Co.
Project A), 9.875%, 10/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,151,316
1,000,000 Burke County, Georgia, Development Authority, PCR
(Georgia Power Co.), 9.375%, 12/1/17 . . . . . . . . . . . . . . . . . . . . . . . 1,133,810
1,000,000 Burlington, Kansas, PCR, MBIA (Kansas Gas & Electric Co. Project), 7.00%, 6/1/31 . . 1,054,670
1,595,000 Capital Industrial Development Corp., Texas, PCR (International Business
Machines Corp.), 7.40%, 5/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,722,472
</TABLE>
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BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR)-CONTINUED
$ 750,000 County of Coshocton, Ohio, Solid Waste Disposal Rev. (Stone
Container Corp. Project), Series 1992, 7.875%, 8/1/13 . . . . . . . . . . . . . . $ 736,185
1,000,000 Hodge, Louisiana, Utility Rev. (Stone Container Corp. Project),
Series 1990, 9.00%, 3/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,930
1,280,000 Illinois Development Finance Authority, PCR (Commonwealth
Edison Co.), 11.375%, 10/15/14 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,349,747
1,250,000 Mercer County, North Dakota, PCR, Basin Electric Power, Series E, 7.00%, 1/1/19 . . . 1,285,713
500,000 Monroe County, Michigan, PCR (Detroit Edison Co.), Series A, 10.50%, 12/1/16 . . . . 542,065
New Hampshire State Industrial Development Authority, PCR
1,000,000 New England Power Co., 7.80%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . 1,047,310
1,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12 . . . . . . . . . . . . . . . . 1,161,110
1,000,000 Parish of St. Charles, Louisiana, PCR (Louisiana Power & Light Co.), 8.25%, 6/1/14 . 1,104,010
1,400,000 Parish of West Feliciana, Louisiana, PCR (Gulf States Utilities),
Series A, 7.50%, 5/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,471,904
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power &
Lighting), Series 1993-A, 6.10%, 1/1/16 . . . . . . . . . . . . . . . . . . . . . 936,680
750,000 Pope County, Arkansas, PCR (Arkansas Power & Light Project), 11.00%, 12/1/15 . . . . 814,463
Sabine River Authority, Texas, Refunding, PCR (Texas Utilities
Co. Project)
1,350,000 7.75%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,411,938
440,000 Series 1986, 9.00%, 9/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,743
--------------
TOTAL PCR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,426,066
--------------
POOL FINANCING PROGRAMS 2.8%
Emmaus, Pennsylvania, General Authority, Local Government Bond
Pool Program, Rev.
1,750,000 Series A, BIG, 8.15%, 5/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,889,650
2,500,000 Series C, BIG, 7.90%, 5/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,679,275
Indianapolis, Indiana, Local Public Improvement
1,000,000 Series A, 6.00%, 2/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945,280
2,000,000 Series C, 6.70%, 1/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,986,020
450,000 Series D, 6.50%, 2/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432,747
550,000 Series D, 6.75%, 2/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558,272
1,000,000 Series D, 6.75%, 2/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,680
670,000 Tampa, Florida, Capital Improvement Program Rev., Series A, 8.25%, 10/1/18 . . . . . 701,410
--------------
TOTAL POOL FINANCING PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . . . 10,185,334
--------------
RESOURCE RECOVERY 3.2%
Broward County, Florida, Resource Recovery Rev.
1,810,000 North Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,971,633
2,365,000 South Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . 2,576,195
1,000,000 Camden County, New Jersey, PCR, Solid Waste Resource Recovery
Rev., Series B, 7.50%, 12/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . . 992,700
1,500,000 Delaware County, Pennsylvania, Industrial Development Authority
Rev. (Resource Recovery Project), 8.10%, 12/1/13 . . . . . . . . . . . . . . . . . 1,602,030
1,000,000 El Centro, California, Certificates of Participation, 7.00%, 6/1/19 . . . . . . . . . 959,170
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Resource Recovery, 7.50%, 1/1/12 . . . . . . . . . . . . . . . . . 1,037,120
2,000,000 Northeast, Maryland, Solid Waste Disposal Authority Rev.
(Montgomery County Resource Recovery Project), Series A, 6.30%, 7/1/16 . . . . . . 1,876,260
</TABLE>
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AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RESOURCE RECOVERY-CONTINUED
$ 500,000 Rockdale County, Georgia, Development Authority Rev., Solid Waste
Disposal (Visy Paper, Inc. Project), 7.50%, 1/1/26 . . . . . . . . . . . . . . . . $ 484,710
--------------
TOTAL RESOURCE RECOVERY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,499,818
--------------
SALES TAX REVENUE 1.5%
1,000,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08 . . . . . . . . . 961,440
1,000,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08 . . . . . . . . . . . . . . . 931,800
1,000,000 Orange County, Florida, Tourist Development Tax Rev., AMBAC, 6.00%, 10/1/16 . . . . . 950,860
Round Lake Beach, Illinois, Tax Increment Rev.
900,000 Series 1993, 7.20%, 12/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . . 855,774
500,000 Series 1993, 7.50%, 12/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,000
975,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area), Series A, 10.00%, 8/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 1,109,102
--------------
TOTAL SALES TAX REVENUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,252,976
--------------
TRANSPORTATION 10.0%
3,000,000 Atlanta, Georgia, Airport Facilities Rev. (Atlanta International
Airport), Series 1990, 6.25%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . 2,826,810
Chicago, Illinois, O'Hare International Airport Rev.
1,000,000 Series A, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,590
1,000,000 Series B, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913,590
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev., 8.00%, 9/15/12 . . . . . . . . 522,285
940,000 Dallas-Fort Worth, Texas, International Airport Facility Rev,
(American Airlines, Inc.), 7.50%, 11/1/25 . . . . . . . . . . . . . . . . . . . . 925,448
2,500,000 Greater Orlando Aviation Authority, Florida, Airport Facilities
Rev., 8.375%, 10/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,762,645
500,000 Hawaii State Harbor Capital Improvement Rev., MBIA, 7.00%, 7/1/17 . . . . . . . . . . 525,205
2,000,000 Indiana Transportation Finance Authority, Airport Facilities Lease Rev.,
Series A, 6.25%, 11/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,894,660
Kentucky State Turnpike Authority, Toll Road Rev., Refunding
1,000,000 Series A, 5.50%, 7/1/07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948,940
8,000,000 Series 1987-A, 5.00%, 7/1/08 . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,078,800
2,000,000 Los Angeles, California, Regional Airport Facility Improvement
Corp., Lease Rev., 11.25%, 11/1/25 . . . . . . . . . . . . . . . . . . . . . . . . 2,203,760
1,500,000 Metropolitan Transportation Authority, New York Transportation
Facilities, Rev., Series G, MBIA, 5.50%, 7/1/15 . . . . . . . . . . . . . . . . . 1,343,295
1,000,000 New Hampshire State Turnpike System, Rev., Refunding, Series A, FGIC, 6.75%, 11/1/11 1,045,350
3,200,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16 . . . . . . . . . . . . 3,281,568
1,000,000 Port Authority of New York and New Jersey, Consolidated Board, 95th
Series, 6.125%, 7/15/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 937,910
1,000,000 Philadelphia, Pennsylvania, Industrial Development Authority Rev.
(Parking Garage II Project), 6.125%, 2/15/03 . . . . . . . . . . . . . . . . . . . 973,780
1,750,000 San Joaquin Hills, California, Transcorridor Agency, Toll Road Rev., 6.75%, 1/1/32 . 1,637,108
1,000,000 St. Louis, Missouri, Parking Facilities Rev., 6.625%, 12/15/21 . . . . . . . . . . . 988,680
1,000,000 Triborough Bridge & Tunnel Authority, New York, Rev., 7.875%, 1/1/18 . . . . . . . . 1,101,960
Tulsa, Oklahoma, Municipal Airport Trust, Rev.
1,000,000 7.60%, 12/1/30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 982,910
800,000 American Airlines, 9.50%, 6/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 841,696
</TABLE>
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AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION-CONTINUED
$ 825,000 Virgin Islands Port Authority, Marine Division Rev.
(Marine Terminal), Series A, 10.13%, 11/1/05 . . . . . . . . . . . . . . . . . . . $ 859,196
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,509,186
--------------
UTILITIES-COMBINATION ELECTRIC, GAS AND/OR WATER 9.5%
AUSTIN, TEXAS, UTILITY SYSTEM REV.
1,250,000 FGIC, 7.75%, 11/15/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,334,700
2,280,000 Refunding, 6.00%, 5/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,131,686
1,000,000 Series A, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,118,640
2,380,000 Series B, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,608,147
1,000,000 Chicago, Illinois, Gas Supply Rev. (People's Gas Lighting and Coke
Co.), Series A, 8.10%, 5/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111,720
1,000,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11 . . . . . . . . . 1,071,490
700,000 Citronelle, Alabama, Utilities Board, Water, Sewer & Gas Rev., 9.00%, 5/1/13 . . . . 757,526
10,950,000 Jefferson County, Kentucky, Capital Project Lease Rev., Waste
Water Treatment Plant, Zero Coupon, 8/15/14 . . . . . . . . . . . . . . . . . . . 2,710,344
750,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16 . . . . . . . . . . . . 835,193
2,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plant Rev., 5.375%, 9/1/23 1,668,520
2,000,000 Massachusetts State Water Resource Authority, Series A, 7.50%, 4/1/16 . . . . . . . . 2,240,700
1,000,000 New Hampshire State Business Finance Authority, Electric Facilities
Rev. (Plymouth Cogeneration Light Power), 7.75%, 6/1/14 . . . . . . . . . . . . . 975,260
New York City Municipal Water Finance Authority, New York,
Water & Sewer Rev.
1,000,000 Series A, 7.625%, 6/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086,040
3,000,000 Series A, MBIA, 7.25%, 6/15/15 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,346,230
4,100,000 Series B, 5.00%, 6/15/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,288,159
1,000,000 New York State Environment Facilities Corp., Water Facilities Rev.
(Long Island Water Corp.), 10.00%, 10/1/17 . . . . . . . . . . . . . . . . . . . . 1,109,150
Norco, California, Sewer and Water Rev., Refunding,
500,000 6.70%, 10/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488,465
500,000 7.20%, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487,570
750,000 Northwest Harris County, Texas, Municipal Utility, Waterworks and
Sewer System Combination Tax, 8.10%, 10/1/15 . . . . . . . . . . . . . . . . . . . 796,117
2,000,000 Orlando, Florida, Utilities Commission, Water & Electric Rev.,
Refunding, 8.625%, 10/1/05; Pre-refunded 10/1/95 . . . . . . . . . . . . . . . . . 2,123,880
Willow Fork, Texas, Drainage District, G.O.
500,000 7.00%, 3/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,825
500,000 7.00%, 3/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502,540
1,000,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17 . . . . . . . . . . . . . . . 1,202,170
--------------
TOTAL UTILITIES-COMBINATION ELECTRIC, GAS AND/OR WATER . . . . . . . . . . . . . . 33,497,072
--------------
UTILITIES-ELECTRIC 23.8%
2,500,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake
Hydroelectric Project), BIG, 6.25%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 2,430,150
1,500,000 Florida State Municipal Power Agency, Refunding (St. Lucie
Project), FGIC, 5.00%, 10/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . . 1,444,245
Georgia State Municipal Electric Authority, Power Rev.
850,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789,582
2,000,000 Series A, 7.875%, 1/1/18; Pre-refunded 1/1/96 . . . . . . . . . . . . . . . . . . 2,117,060
1,750,000 Series Q, 8.375%, 1/1/16; Pre-refunded 1/1/98 . . . . . . . . . . . . . . . . . . 1,937,880
</TABLE>
C-8
<PAGE> 64
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES-ELECTRIC-CONTINUED
$ 9,685,000 Grand River Dam Authority, Oklahoma, Rev., Series 1987, 5.00%, 6/1/12 . . . . . . . . $ 8,252,395
Intermountain Power Agency, Utah, Power Supply Authority Rev.
1,850,000 1st Crossover Series, 5.00%, 7/1/16 . . . . . . . . . . . . . . . . . . . . . . . 1,527,212
1,000,000 Series A, 6.00%, 7/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921,820
2,400,000 Series A, 7.75%, 7/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,571,240
3,650,000 Series B, 7.75%, 7/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,963,426
2,000,000 Series H, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,847,580
2,000,000 Series I, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,847,580
1,000,000 Lewis County, Washington, Public Utility District No. 1, Rev.
(Cowlitz Falls Hydroelectric Project), 6.00%, 10/1/24 . . . . . . . . . . . . . . 913,580
Massachusetts Municipal Wholesale Electric Co., Rev.
2,060,000 Series B, 13.00%, 7/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,145,305
310,000 Series B, 13.625%, 7/1/17; Pre-refunded 1/1/93 . . . . . . . . . . . . . . . . . . 326,380
750,000 Michigan Public Power Agency, Rev., Refunding (Belle River
Project), 7.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778,958
1,250,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd
Crossover Series Rev., 8.125%, 1/1/17 . . . . . . . . . . . . . . . . . . . . . . 1,374,988
3,000,000 Muscatine, Iowa, Electric Authority Rev., 5.00%, 1/1/08 . . . . . . . . . . . . . . . 2,628,210
2,500,000 New York State Power Authority, Rev., Series T, 7.375%, 1/1/18 . . . . . . . . . . . 2,636,000
300,000 Northern California, Public Power Agency, Rev., 5.00%, 7/1/09 . . . . . . . . . . . . 254,643
North Carolina Eastern Municipal Power Agency, Power System Rev.
335,000 8.00%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,279
2,665,000 8.00%, 1/1/21; Pre-refunded 1/1/98 . . . . . . . . . . . . . . . . . . . . . . . . 2,945,651
7,695,000 Series A, 4.50%, 1/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,076,972
North Carolina Municipal Power Agency No. 1, Catawba Electric Rev.
1,000,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909,550
2,850,000 7.875%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,139,161
1,070,000 Piedmont Municipal Power Agency, South Carolina, Rev., 5.00%, 1/1/25 . . . . . . . . 828,587
5,290,000 Salt River Project, Arizona Agricultural Improvement & Power
District Electric System Rev., 7.875%, 1/1/28 . . . . . . . . . . . . . . . . . . 5,826,723
Sam Rayburn, Texas, Municipal Power Agency, Refunding
1,000,000 Series A, 6.25%, 10/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870,840
1,000,000 Series A, 6.75%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949,640
1,000,000 South Carolina, Public Service Authority, 7.875%, 7/1/21; Pre-refunded 1/1/96 . . . . 1,053,297
Southern Minnesota Municipal Power Agency, Power Supply System Rev.
2,000,000 Series A, 5.00%, 1/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,654,780
1,250,000 Series C, 5.00%, 1/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,029,625
8,565,000 Texas Municipal Power Agency Rev., 5.50%, 9/1/13 . . . . . . . . . . . . . . . . . . 7,621,908
Washington State Public Power Supply System Rev.
1,250,000 Nuclear Project No. 1, Series B, 7.125%, 7/1/16 . . . . . . . . . . . . . . . . . 1,312,438
445,000 Nuclear Project No. 1, Series D, 15.00%, 7/1/17 . . . . . . . . . . . . . . . . . 534,574
2,500,000 Nuclear Project No. 2, Series B, 7.00%, 7/1/12 . . . . . . . . . . . . . . . . . . 2,596,400
1,000,000 Nuclear Project No. 2, Series B, 7.375%, 7/1/12 . . . . . . . . . . . . . . . . . 1,117,760
2,000,000 Nuclear Project No. 2, Series 1990-C, 7.625%, 7/1/10 . . . . . . . . . . . . . . . 2,264,820
3,000,000 Nuclear Project No. 3, MBIA 5.60%, 7/1/17 . . . . . . . . . . . . . . . . . . . . 2,626,560
--------------
TOTAL UTILITIES-ELECTRIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,437,799
--------------
TOTAL MUNICIPAL BONDS (Cost $321,111,687) . . . . . . . . . . . . . . . . . . . . 336,480,439
--------------
</TABLE>
C-9
<PAGE> 65
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL VARIABLE RATE DEMAND NOTES + 3.7%
$ 100,000 Arkansas State Development Finance Authority, 3.65%, 12/1/15 . . . . . . . . . . . . $ 100,000
California Statewide Communities Development Corp. Rev., Series A
600,000 3.50%, 6/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
1,000,000 3.50%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
400,000 Cuyahoga County, Ohio, IDR (Allen Group, Inc. Project), 3.50%, 12/1/15 . . . . . . . 400,000
500,000 Dade County, Florida, Industrial Development Authority Rev.,
(Dynacolor Graphic Project), 4.00%, 6/1/99 . . . . . . . . . . . . . . . . . . . . 500,000
500,000 Delaware County, Pennsylvania, Industrial Development Authority Rev.
(Ram Motors, Inc.), 4.20%, 9/1/10 . . . . . . . . . . . . . . . . . . . . . . . . 500,000
300,000 Fort Wayne, Indiana, Hospital Authority, Series C, 3.90%, 1/1/16 . . . . . . . . . . 300,000
900,000 Illinois Development Finance Authority Rev., 3.70%, 4/1/07 . . . . . . . . . . . . . 900,000
100,000 Illinois Health Facilities Authority Rev., 3.70%, 1/1/18 . . . . . . . . . . . . . . 100,000
800,000 Indiana Health Facilities Financing Authority Rev., Capital Access
Designated Pool Program, 3.70%, 12/1/02 . . . . . . . . . . . . . . . . . . . . . 800,000
100,000 Maricopa County, Arizona, Industrial Development Authority,Hospital Facility Rev.
(Samaritan Health Services Hospital), Series B-2, 3.60%, 12/1/08 . . . . . . . . . 100,000
New York City, New York, G.O.
500,000 3.70%, 8/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
700,000 3.70%, 8/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
400,000 3.70%, 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
1,550,000 New York, New York, Subseries A-7, G.O., 3.95%, 8/1/20 . . . . . . . . . . . . . . . 1,550,000
100,000 New York State Job Development Authority, 3.60%, 3/1/07 . . . . . . . . . . . . . . . 100,000
500,000 Ossian, Indiana, Economic Development Rev. (Walbro Auto Corporation
Project), 3.80%, 12/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
3,100,000 Panola County, Mississippi (Moog Automotive, Inc. Project), 3.85%, 9/1/10 . . . . . . 3,100,000
400,000 Pennsylvania State Higher Educational Facility Authority Rev.,
Series B, 3.75%, 7/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
300,000 Sacramento County, California, Multi-family Housing Rev., Series E, 3.75%, 9/15/07 . 300,000
100,000 Uinta County, Wyoming, PCR, Refunding (Chevron U.S.A., Inc.
Project), 3.50%, 12/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
--------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $12,950,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,950,000
--------------
TOTAL INVESTMENTS (Cost $334,061,687) 98.6% . . . . . . . . . . . . . . . . . . . . . 349,430,439
Other assets and liabilities, net 1.4% . . . . . . . . . . . . . . . . . . . . . . . 4,826,629
--------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,257,068
==============
</TABLE>
<TABLE>
<S> <C>
Insurers:
+ Interest rates are as of September 30, 1994. AMBAC - AMBAC Indemnity Corp.
FHA - Federal Housing Administration BIG - Bond Investors Guaranty Insurance Co.
G.O. - General obligation bond FGIC - Financial Guaranty Insurance Corp.
Rev. - Revenue bond FSA - Financial Security Assurance Inc.
IDR - Industrial Revenue Bond MBIA - Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
C-10
<PAGE> 66
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $334,061,687) . . . . . . . . . . . . . $ 349,430,439
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,191
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,945,043
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . . . 677,921
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . 255,397
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,370
----------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,316,361
----------------
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . 1,836,732
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,716
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,415
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,623
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,807
----------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,059,293
----------------
Net Assets, equivalent to $9.82 per share for Class A
shares and $9.83 per share for Class B and Class C
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,257,068
================
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 31,463,264 Class A, 3,791,614
Class B and 814,200 Class C shares outstanding . . . . . . . . . . . . . . $ 360,691
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,124,331
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . (9,469,519)
Net unrealized appreciation of investments. . . . . . . . . . . . . . . . . 15,368,752
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,127,187)
----------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . . . $ 354,257,068
================
</TABLE>
See Notes to Financial Statements.
C-11
<PAGE> 67
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
STATEMENT OF OPERATIONS
Year Ended September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,134,366
---------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,804,381
Service fees -- Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686,403
Distribution and service fees -- Class B. . . . . . . . . . . . . . . . . . . . . 311,708
Distribution and service fees -- Class C. . . . . . . . . . . . . . . . . . . . . 54,489
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . 407,704
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,272
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . 109,827
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,148
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,177
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,983
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 15,386
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,381
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,628,859
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,505,507
---------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . (2,005,680)
Net unrealized depreciation of securities during the year . . . . . . . . . . . . (23,803,245)
---------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . (25,808,925)
---------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . $ (5,303,418)
===============
</TABLE>
See Notes to Financial Statements.
C-12
<PAGE> 68
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended September 30
--------------------------------------
1994 1993
--------------- -------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . $ 355,682,180 $ 292,305,914
--------------- -------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . 20,505,507 18,722,991
Net realized loss on securities . . . . . . . . . . . . . . . (2,005,680) (61,760)
Net unrealized appreciation (depreciation)
of securities during the year . . . . . . . . . . . . . . . . (23,803,245) 18,032,935
--------------- -------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . (5,303,418) 36,694,166
--------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,227,557) (18,216,098)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,534,981) (490,357)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,302) (275)
--------------- -------------
(20,038,840) (18,706,730)
--------------- -------------
In excess of book-basis net investment income (Note 1D)
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . - (252,018)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . - (55,026)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4,939)
--------------- -------------
- (311,983)
--------------- -------------
Total dividends and distributions to shareholders . . . . . . . (20,038,840) (19,018,713)
--------------- -------------
NET EQUALIZATION CREDITS (DEBITS) (NOTE 1F) . . . . . . . . . . (20,289) 81,721
--------------- -------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,766,921 54,755,685
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,694,674 22,802,935
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,071,276 1,280,053
--------------- -------------
84,532,871 78,838,673
--------------- -------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,485,166 10,718,588
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . 958,506 333,342
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,364 3,626
--------------- -------------
11,627,036 11,055,556
--------------- -------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,814,520) (42,583,199)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,282,719) (1,691,938)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,125,233) -
--------------- -------------
(72,222,472) (44,275,137)
--------------- -------------
Increase in net assets resulting from capital transactions . 23,937,435 45,619,092
--------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . . . . (1,425,112) 63,376,266
--------------- -------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . $ 354,257,068 $ 355,682,180
=============== =============
</TABLE>
See Notes to Financial Statements.
C-13
<PAGE> 69
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
American Capital Municipal Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS
Investments in municipal bonds are valued at the most recently quoted
bid prices or at bid prices based on a matrix system (which considers
such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service. Municipal
variable rate demand notes are valued at par; periodic rate changes
reflect current market conditions.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations until the
remaining days to maturity becomes less than 61 days. From such time,
until maturity, the investments are valued at amortized cost.
Issuers of certain securities owned by the Fund have obtained
insurance guaranteeing their timely payment of principal and interest
at maturity. The insurance reduces financial risk but not market risk
of the security.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims
of other senior lenders and uncertainties exist as to an issuer's
ability to meet principal and interest payments. At September 30,
1994, debt securities rated below investment grade and comparable
unrated securities represented approximately 19% of the investment
portfolio.
B. FEDERAL INCOME TAXES
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of net realized capital gains will
be made until tax basis capital loss carryforwards expire or are
offset by net realized capital gains.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which
may differ from generally accepted accounting principles. Such
dividends or distributions may exceed financial statement earnings.
E. DEBT DISCOUNT AND PREMIUM
The Fund accounts for debt discounts and premiums on the same basis as
is followed for federal income tax reporting. Accordingly, original
issue discounts and all premiums are amortized over the life of the
security. Market discounts are recognized at the time of sale as
realized gains for book purposes, and ordinary income for tax
purposes.
F. EQUALIZATION
At September 30, 1994, the Fund discontinued the accounting practice
of equalization, which it had used since its inception. Equalization
is a practice whereby a portion of the proceeds from sales and costs
of redemptions of Fund shares, equivalent on a per-share basis to the
C-14
<PAGE> 70
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
amount of the undistributed net investment income, is charged or
credited to undistributed net investment income.
The balance of equalization included in undistributed net investment
income at the date of change, which was approximately $2.8 million,
was reclassified to capital surplus. Such reclassification had no
effect on net assets, results of operations, or net asset value per
share of the Fund.
G. WHEN-ISSUED SECURITIES
Delivery and payment for securities purchased on a when-issued basis
may take place up to 45 days after the date of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.
NOTE 2-MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
American Capital Asset Management, Inc. (the "Adviser") serves as investment
manager of the Fund. Management fees are paid monthly, based on the rate of
.50% per annum of the average daily net assets of the Fund.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended September 30, 1994, these charges included $10,303 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent. These services are provided at
cost plus a profit. For the year ended September 30, 1994, the fees for such
services were $334,826.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retailer Dealer"), both
affiliates of the Adviser, received $118,647 and $105,378, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to reimburse the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional fee of up to .75% per annum
of their average daily net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $1.6 million and $130,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.
Legal fees of $11,680 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3-INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $45,734,980 and $21,355,006,
respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was
C-15
<PAGE> 71
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
$334,094,902. Net unrealized appreciation of investments aggregated
$15,335,537, gross unrealized appreciation of investments aggregated
$19,847,942, and gross unrealized depreciation of investments aggregated
$4,512,405.
The net realized capital loss carryforward for federal income tax purposes of
approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.
NOTE 4-DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,320 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $490. During the year, such fees aggregated $13,494.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$25,830. The deferred fees have been credited with interest at a rate equal to
that earned by the Fund on its short-term investments.
NOTE 5-CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has 200 million of each class of shares of $.01 par value of capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30
-------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 4,883,618 5,402,298
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 2,518,998 2,225,454
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 884,668 121,207
---------- ----------
8,287,284 7,748,959
---------- ----------
Shares issued for dividends and distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . 1,032,887 1,047,735
Class B . . . . . . . . . . . . . . . . . . . . . . . . . 94,773 32,208
Class C . . . . . . . . . . . . . . . . . . . . . . . . . 18,175 344
---------- ----------
1,145,835 1,080,287
---------- ----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . (6,004,203) (4,190,132)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . (915,403) (164,467)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . (210,194) -
---------- ----------
(7,129,800) (4,354,599)
---------- ----------
Increase in shares outstanding . . . . . . . . . . . . . . 2,303,319 4,474,647
========== ==========
</TABLE>
NOTE 6-SUBSEQUENT DIVIDENDS
The Board of Directors of the Fund declared a dividend of $.0485 per share for
Class A shares, $.0415 per share for Class B shares and $.0415 for Class C
shares from net investment income, payable November 15, 1994 to shareholders of
record on October 31, 1994.
C-16
<PAGE> 72
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class A(1)
------------------------------------------------
Year Ended September 30
------------------------------------------------
1994 1993(2) 1992 1991 1990
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period . . . . . . . . . $10.53 $ 9.98 $9.64 $9.13 $9.33
-------- ------- ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . .68 .69 .705 .71 .72
Expenses . . . . . . . . . . . . . . . . . . . . . . . (.09) (.094) (.09) (.08) (.08)
-------- ------- ------ ------- ------
Net investment income . . . . . . . . . . . . . . . . . .59 .596 .615 .63 .64
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . . . . . . (.7255) .558 .349 .5198 (.195)
-------- ------- ------ ------- ------
Total from investment operations . . . . . . . . . . . (.1355) 1.154 .964 1.1498 .445
-------- ------- ------ ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . . . (.5745) (.596) (.624) (.6398) (.645)
Distributions in excess of book-basis
net investment income(3) . . . . . . . . . . . . . . - (.008) - - -
-------- ------- ------ ------- ------
Total distributions . . . . . . . . . . . . . . . . . . (.5745) (.604) (.624) (.6398) (.645)
-------- ------- ------ ------- ------
Net asset value, end of period . . . . . . . . . . . . $ 9.82 $10.53 $9.98 $9.64 $9.13
======== ======= ====== ======= ======
TOTAL RETURN(4) . . . . . . . . . . . . . . . . . . . (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . $309.0 $332.3 $292.3 $266.9 $237.4
Average net assets (millions) . . . . . . . . . . . . . $324.2 $313.0 $278.6 $253.2 $241.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . . . . . .93% .91% .90% .89% .86%
Net investment income . . . . . . . . . . . . . . . . 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate . . . . . . . . . . . . . . . . 6% 3% 6% 10% 17%
</TABLE>
(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1
stock split effected July 26, 1991. Additionally, in 1991, the Fund
adopted for financial reporting purposes a method of accounting for
debt discounts and premiums which is the same as is used for federal
income tax reporting. The effect of the change, on a pro forma basis,
would have been to increase net investment income with a corresponding
decrease in net realized and unrealized gains or losses in the amount
of $.01 for 1990. Similarly, the ratio of net investment income to
average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position
93-2, Determination, Disclosure and Financial Statement Presentation
of Income, Capital Gain and Return of Capital Distributions by
Investment Companies. Prior year financial information was not
restated.
(4) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
C-17
<PAGE> 73
AMERICAN CAPITAL MUNICIPAL
BOND FUND, INC.
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class B(1) Class C(2)
------------------------ -----------------------------
Year August 30,
Year Ended September 30, Ended 1993(3) through
------------------------ September 30, September 30,
1994 1993(2) 1994 1993
-------- --------- ------------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . . . . . $ 10.53 $ 9.98 $ 10.54 $ 10.53
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . .68 .685 .69 .05
Expenses . . . . . . . . . . . . . . . . . . . . . (.17) (.175) (.18) (.015)
------- ------- ------- -------
Net investment income . . . . . . . . . . . . . . . .51 .51 .51 .035
Net realized and unrealized gains or
losses on securities . . . . . . . . . . . . . . . (.7195) .564 (.7295) .061
------- ------- ------- -------
Total from investment operations . . . . . . . . . (.2095) 1.074 (.2195) .096
------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income . . . . . . . (.4905) (.501) (.4905) (.007)
Distributions in excess of book-basis net
investment income(3) . . . . . . . . . . . . . . - (.023) - (.079)
------- ------- ------- -------
Total distributions . . . . . . . . . . . . . . . . (.4905) (.524) (.4905) (.086)
------- ------- ------- -------
Net asset value, end of period . . . . . . . . . . $ 9.83 $ 10.53 $ 9.83 $ 10.54
======= ======= ======= =======
TOTAL RETURN(4) . . . . . . . . . . . . . . . . . . (2.13%) 11.15% (2.03%) .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . $ 37.2 $ 22.1 $ 8.0 $ 1.3
Average net assets (millions) . . . . . . . . . . . $ 31.2 $ 10.0 $ 5.4 $ 0.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . . . . . . . 1.72% 1.71% 1.72% 1.69%(6)
Net investment income . . . . . . . . . . . . . . 5.00% 4.96% 5.03% 4.25%(6)
Portfolio turnover rate . . . . . . . . . . . . . . 6% 3% 6% 3%
</TABLE>
(1) Sales of Class B commenced September 29, 1992 at a net asset value of
$10.00 per share. At September 30, 1992, there were 50 Class B shares
outstanding with a per share net asset value of $9.98. The decrease in
net asset value was due principally to a dividend of $.052 per share.
Other financial highlights for Class B shares for this short period
(September 29, 1992 to September 30, 1992) are not presented as they
are not meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position
93-2, Determination, Disclosure and Financial Statement Presentation
of Income, Capital Gain and Return of Capital Distributions by
Investment Companies.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales
charges.
(5) Commencement of offering of sales.
(6) Annualized
See Notes to Financial Statements.
C-18
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Municipal Bond
Fund, Inc. at September 30, 1994, and the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 11, 1994
C-19
<PAGE> 75
APPENDIX D
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 95.6%
EDUCATION 4.6%
1,000 Browrard County, Florida, Educational Facilities
Authority Rev. (Nova University Project),
G.O. ............................................ 8.500 04/01/10 1,143,070
625 Clear Creek, Texas, Independent School District,
G.O. ............................................ 6.250 02/01/11 660,175
1,000 Cook County, Illinois, Community College,
District #508, Certificates of Participation,
FGIC............................................. 8.750 01/01/07 1,252,580
1,150 Florida State Board of Education, Capital Outlay,
Series A......................................... 7.250 06/01/23 1,266,722
1,000 Illinois Educational Facilities Authority Rev.,
G.O. Lake First College, FSA..................... 6.750 10/01/21 1,041,270
1,000 Illinois Educational Facilities Authority Rev.,
G.O.,
Northwestern University, Series 1985............. 6.900 12/01/21 1,113,650
2,000 New Hampshire Higher Education & Daniel Webster
College Issue, G.O. ............................. 7.625 07/01/16 1,960,540
1,000 New York City, New York, Industrial Development
Agency, Civil Facility Rev. (Marymount Manhattan
College Project), G.O. .......................... 7.000 07/01/23 1,009,310
1,000 New York State Dormitory Authority Rev. City
University (Prerefunded @ 7/1/97)................ 8.125 07/01/17 1,091,920
3,250 New York State Dormitory Authority Rev., State
University Education Facility, Series 1990-A..... 7.700 05/15/12 3,705,130
500 Pennsylvania State Higher Educational Facilities
Authority Rev. Hahnemann University Project,
MBIA, G.O. ...................................... 7.200 07/01/19 533,815
250 Pennsylvania State Higher Educational Facilities
Authority Rev., Pennsylvania Medical College,
Series A, G.O. .................................. 7.500 03/01/14 257,635
500 University of the Virgin Islands, Series A....... 7.500 10/01/09 521,130
500 University of the Virgin Islands, Series A....... 7.650 10/01/14 518,185
------------
TOTAL EDUCATION.................................. 16,075,132
------------
HEALTH CARE 1.7%
500 Colorado Health Facilities Authority Rev.
(Cleo Wallace Center Project).................... 7.000 08/01/15 502,435
</TABLE>
See Notes to Financial Statements
D-1
<PAGE> 76
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Colorado Health Facilities Authority Rev. (PSL
Healthcare System Project), Series 1991-A, FSA... 6.250 02/15/21 1,518,435
1,000 Cuyahoga County, Ohio, Health Care Facilities
Rev. (Jenning Hall).............................. 7.300 11/15/23 947,300
1,000 Lebanon County, Pennsylvania, Health Facilities
Authority Health Center Rev. (UTD Church of
Christ Homes Project)............................ 6.750 10/01/10 1,004,600
700 Massachusetts State, Industrial Finance Rev. .... 7.100 11/15/18 672,875
230 Pina County, Arizona, Industrial Development
Authority (Casa Grande Regional Medical Center
Project)......................................... 9.000 12/01/13 238,425
1,000 St. Petersburg, Florida, Health Facilities
Authority Rev.
(Allegany Health Systems)........................ 7.750 12/01/15 1,130,330
------------
TOTAL HEALTH CARE................................ 6,014,400
------------
HOSPITAL 15.5%
500 Bexar County, Texas, Health Facilities
Development Rev. (St. Lukes Lutheran Hospital
Project)......................................... 7.000 05/01/21 509,830
1,500 Bexar County, Texas, Health Facilities
Development Rev. (St. Lukes Lutheran Hospital
Project)......................................... 7.900 05/01/18 1,762,245
1,000 Boston Massachusetts, Rev. (Boston City
Hospital), FHA................................... 7.625 02/15/21 1,133,810
500 Boulder County, Colorado, Industrial Development
Rev. (Boulder Medical Center Project)............ 8.875 01/01/17 518,565
1,000 Charlotte County, Florida, Hospital Authority
Rev.
(Bon Secours Health System)...................... 8.250 08/15/18 1,120,860
500 Clarksville, Tennessee, Hospital Rev., Refunding
& Improvement (Clarksville Memorial Project)..... 6.250 07/01/13 477,960
995 Clearfield, Pennsylvania, Hospital Authority Rev.
(Clearfield Hospital Project), Series-94......... 6.875 06/01/16 995,587
800 Colorado Health Facilities Authority Rev. (Rocky
Mountain Adventist).............................. 6.625 02/01/13 779,520
2,000 Delaware State Economic Development Authority
Rev. (Osteopathic Hospital Association of
Delaware), Series A.............................. 6.900 01/01/18 1,835,120
500 Erie County, Pennsylvania, Hospital Authority
Rev. (Metro Health Center), Series 1992.......... 7.250 07/01/12 514,150
</TABLE>
See Notes to Financial Statements
D-2
<PAGE> 77
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Harris County, Texas, Health Facilities
Development Corp. (Memorial Hospital System
Project)......................................... 7.125 06/01/15 1,057,750
1,000 Illinois Health Facilities Authority Rev.
Elmhurst
Memorial Hospital, Series 87-Ay.................. 8.125 01/01/13 1,073,910
1,000 Illinois Health Facilities Authority Rev.
Improvement Swedish Covenant, Series A........... 6.300 08/01/13 933,080
2,000 Illinois Health Facilities Authority Rev.
Lutheran Health System, Series B, MBIA........... 6.000 04/01/18 1,922,940
1,000 Illinois Health Facilities Authority Rev. Masonic
Medical Center, Series 1989-B.................... 7.700 10/01/19 1,124,910
1,000 Illinois Health Facilities Authority Rev.,
Memorial Hospital................................ 7.250 05/01/22 1,005,850
500 Illinois Health Facilities Authority Rev. Mercy
Center For Health Care Services.................. 6.625 10/01/12 500,350
1,000 Illinois Health Facilities Authority Rev.,
Northwestern Memorial Hospital................... 6.750 08/15/11 1,031,460
1,000 Indiana Health Facilities, Financing Hospital
Authority Rev. (Community Hospital of Indiana),
Series-H,
MBIA............................................. 6.850 07/01/22 1,044,390
1,160 Jefferson County, Texas, Health Facility
Authority Rev. (Baptist Health Care Project)..... 8.300 10/01/14 1,263,426
845 Lebanon County, Pennsylvania, Good Samaritan
Hospital Authority Rev. (Good Samaritan Hospital
Project)......................................... 5.850 11/15/07 772,279
1,000 Marion County, Indiana, Hospital Authority,
Facility Rev., (Methodist Hospital of Indiana)... 6.500 09/01/13 1,006,840
1,000 McKeesport, Pennsylvania, Hospital Authority Rev.
(McKeesport Hospital Project).................... 6.500 07/01/08 979,910
1,000 Michigan State Hospital Finance Authority Rev.
St. Joseph Hospital Corp., Series A.............. 8.125 07/1/05 1,045,100
1,000 Michigan State Hospital Finance Authority Rev.,
Refunding, Genesys Health System, Series A....... 7.500 10/1/07 1,010,500
1,000 Missouri State Health & Educational Facilities
Authority (Heartland Health Systems Project)..... 8.125 10/1/10 1,112,180
1,000 New Hampshire Health & Higher Educational
Facility Authority Rev........................... 7.500 06/1/05 1,042,440
</TABLE>
See Notes to Financial Statements
D-3
<PAGE> 78
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,500 New Hampshire Health & Higher Educational
Facility Authority Rev. (Wentworth Douglass
Hospital)........................................ 8.500 01/1/15 2,700,525
1,000 New York State Medical Care Facilities Finance
Agency Rev. Columbia Presbyterian Hospital,
Series A, FHA.................................... 8.000 02/15/25 1,092,980
1,960 New York State Medical Care Facilities Finance
Agency Rev., Montefiore Medical Center........... 7.250 02/15/09 2,104,080
1,000 New York State Medical Care Facilities Finance
Agency Rev., North General Hospital, Series
89-A............................................. 7.400 02/15/19 1,034,670
1,000 Newton, Kansas, Hospital Rev., Newton Health Care
Corp., Series-A.................................. 7.750 11/15/24 1,018,260
695 Philadelphia, Pennsylvania, Hospital & Higher
Education Facilities Authority Rev. (Roxborough
Memorial Hospital), Series 2..................... 7.250 03/1/24 649,040
1,500 Richardson, Texas, Hospital Authority, Refunding
& Improvement Rev. (Richardson Medical Center)... 6.750 12/01/23 1,507,740
1,000 Royal Oak, Michigan, Hospital Finance Authority,
Rev. (William Beaumont Hospital), Series D....... 6.750 01/1/20 1,027,130
1,750 Rusk County, Texas, Health Facilities Corp.,
Hospital Rev. (Henderson Memorial Hospital
Project)......................................... 7.750 04/1/13 1,801,450
500 Salem, Oregon, Hospitals Facilities Authority
Rev.............................................. 7.500 12/1/24 507,295
1,000 Scranton-Lackawanna, Pennsylvania, Health &
Welfare Authority Rev. (Moses Taylor Hospital
Project), Series A............................... 7.375 07/15/08 1,012,830
500 Scranton-Lackawanna, Pennsylvania, Health &
Welfare Authority Rev. (Moses Taylor Hospital
Project), Series B............................... 8.250 07/1/09 536,310
1,000 South Dakota State Health & Educational
Facilities Authority Rev. (Sioux Valley
Hospital)........................................ 7.250 04/1/20 1,003,450
2,000 South Dakota State Health & Educational
Facilities Authority Rev. (Sioux Valley
Hospital)........................................ 7.625 11/1/13 2,221,598
1,500 St. Joseph County, Indiana, Hospital Authority
Rev. (Memorial Hospital South Bend Project),
MBIA............................................. 6.250 08/15/22 1,504,245
1,000 Tyler, Texas, Health Facilities Development Corp.
(East Texas Medical Center Regional Health),
Series B......................................... 6.750 11/1/25 964,310
1,000 Washington County, Pennsylvania, Hospital
Authority........................................ 7.350 06/1/13 952,800
</TABLE>
See Notes to Financial Statements
D-4
<PAGE> 79
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Wells County, Indiana, Hospital Authority Rev.,
Refunding (Caylor-Nickel Medical Center, Inc.)... 8.500 04/15/03 1,529,550
1,000 Weslaco, Texas, Health Facilities Development
(Knapp Medical Center Project), Series-A......... 5.250 06/1/16 885,540
1,000 West Virginia State, Hospital Finance Authority,
Refunding & Improvement (Fairmont General
Hospital), Series A.............................. 6.750 03/01/14 969,850
2,000 Wisconsin State Health & Educational Facilities
Rev. (Wheaton Franciscan Services Inc.).......... 8.200 08/15/18 2,238,660
------------
TOTAL HOSPITAL................................... 54,837,275
------------
HOUSING 5.8%
1,545 Arapahoe County, Colorado, Single Family Mtg.
Rev. ............................................ 8.375 08/01/19 1,618,094
1,000 Austin, Texas, Housing Finance Corp.,
Multi-family Rev. (Stassey Woods Apartment
Project)......................................... 6.750 04/01/19 979,090
410 Bexar County, Texas, Housing Finance Corp.,
Rev. ............................................ 8.200 04/01/22 431,550
420 Bexar County, Texas, Housing Finance Corp., Rev.,
Series B......................................... 9.250 04/01/16 440,534
135 El Paso, Texas, Property Finance Authority Inc.,
Single Family Mtg. Rev., Series A................ 8.700 12/01/18 145,064
645 Fort Worth, Texas, Housing Finance Corp., Home
Mtg. Rev. Refunding.............................. 8.500 10/01/11 702,605
735 Harris County, Texas, Housing Financing Corp.,
Single Family Mtg. Rev., Series 1983-A........... 10.125 07/15/03 737,742
670 Houston, Texas, Housing Finance Corp., Single
Family Mgt. Rev. ................................ 10.000 09/15/14 689,309
855 Houston, Texas, Housing Finance Corp., Single
Family Mgt. Rev., Series A, FSA.................. 5.950 12/01/10 842,089
1,000 Maricopa County, Arizona, IDR, Multi-Family Rev.,
Refunding (Laguna Point Apartments Project)...... 6.500 07/01/09 1,016,630
1,000 Massachusetts State Housing Finance Agency,
Multi-family Housing Authority, Series A......... 8.750 08/01/08 1,051,250
550 Massachusetts State Housing Finance Agency,
Residential Housing Authority, Series A.......... 8.400 08/01/21 578,875
910 Minnesota State Housing Finance Agency, Single
Family Mtg. Rev. ................................ 6.750 01/01/26 907,725
</TABLE>
See Notes to Financial Statements
D-5
<PAGE> 80
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Montgomery County, Pennsylvania, Industrial
Development Authority, Retirement Community Rev.
(GDL Farms Corp. Project)........................ 6.300 01/01/13 907,690
1,000 Mount Clemens, Michigan, Housing Corp., Multi-
family Rev., Refunding, Series A................. 6.600 06/01/13 1,030,480
1,000 North St. Paul, Minnesota, Multi-family Refunding
Housing Rev. (Cottages North St. Paul)........... 9.250 02/01/22 1,086,250
1,000 Pima County, Arizona, IDR, Single Family Mtg.
Rev.............................................. 6.625 11/01/14 1,018,000
1,155 Ridgeland, Mississippi, Urban Renewal (The
Orchard, Ltd. Project), Series A................. 7.750 12/01/15 1,130,410
2,500 St. Paul, Minnesota Port Authority, Housing &
Redevelopment Authority, Multi-family Housing
Rev., Series J................................... 9.500 12/01/11 2,396,875
1,000 South Dakota State Housing Development Authority,
Homeowner Mtg., Series D-1....................... 6.850 05/01/26 1,017,500
1,450 Texas State Veterans Housing Assistance, MBIA,
G.O.,............................................ 6.800 12/01/23 1,521,616
245 Travis County, Texas, Housing Finance Corp.,
Single Family Mtg. Rev........................... 8.200 04/01/22 253,134
------------
TOTAL HOUSING.................................... 20,502,512
------------
LIFE CARE 2.7%
500 Atlantic Beach, Florida, Rev., Refunding &
Improvement Fleet Landing Project, Series A...... 7.500 10/01/02 506,270
500 Atlantic Beach, Florida, Rev., Refunding &
Improvement Fleet Landing Project, Series A...... 7.875 10/01/08 514,430
2,000 Butler County, Pennsylvania, Industrial
Development Authority Rev., 1st Mgt. Rev.
(Sherwood Oaks Project), Series A................ 8.750 06/01/16 2,099,300
500 Chartiers Valley, Pennsylvania, Industrial &
Commercial Development Authority (Asbury Health
Center Project).................................. 7.250 12/01/11 503,840
500 Chartiers Valley, Pennsylvania, Industrial &
Commercial Development Authority (Asbury Health
Center Project).................................. 7.400 12/01/15 494,195
950 Hanover Park, Illinois, 1st Mgt. Rev. Windsor
Park Manor Project............................... 9.250 12/01/07 1,029,733
1,000 Massachusetts State Industrial Finance Agency
Rev. 1st Mtg. Reeds Landing Project.............. 8.625 10/01/23 1,012,350
</TABLE>
See Notes to Financial Statements
D-6
<PAGE> 81
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Massachusetts State Industrial Finance Agency,
Greater Lynn Mental Health Association Project... 8.800 06/01/14 1,105,680
500 Scottsdale, Arizona, Industrial Development
Authority, Refunding, 1st Mtg. Westminter
Village, Series A................................ 8.250 06/01/15 528,275
500 Tempe, Arizona, Industrial Development Authority
Rev. Friendship Village Temple, Series-A......... 6.750 12/01/13 487,020
1,000 Wisconsin State Health & Educational Facilities
Authority Rev., (United Lutheran Program for the
Aging Inc. Project).............................. 8.500 03/01/19 1,058,750
------------
TOTAL LIFE CARE.................................. 9,339,843
------------
MISCELLANEOUS 7.6%
500 Berry Creek Metropolitan District, Colorado,
G.O., Refunding and Improvement.................. 8.250 12/01/11 534,280
2,000 Compton, California, Certificates of
Participation, Refunding, Series B............... 7.500 08/01/15 2,119,320
1,000 Detroit, Michigan, Tax Increment Bonds
(Development Area No. 1 Project) Series 89-A..... 7.600 07/01/10 1,047,270
2,500 District of Columbia Rev. (National Public
Radio), Series A................................. 7.700 01/01/23 2,621,775
1,000 Dove Valley Metropolitan District, Arapahoe
County, Colorado, G.O............................ 9.500 12/01/08 1,048,290
1,000 Du Page County, Illinois (Stormwater Project).... 6.550 01/01/21 1,091,860
500 Fort Bend County, Texas, Levee Improvement
District No. 11, G.O............................. 8.700 03/01/09 547,735
440 Fort Bend County, Texas, Levee Improvement
District No. 11, G.O............................. 8.700 03/01/10 482,007
1,000 Lake Charles, Louisiana, Harbor & Terminal
Facilities Rev. (Trunkline Liquified Natural Gas
Co. Project)..................................... 7.750 08/15/22 1,074,380
1,000 Lehigh County, Pennsylvania, IDR (Allentown
Interstate Motel................................. 8.000 08/01/12 1,022,720
630 Mountain Village Metropolitan District, San
Miguel County, Colorado, Refunding, Series 1992,
G.O. ............................................ 7.950 12/01/03 652,182
500 Mountain Village Metropolitan District, San
Miguel County, Colorado, Refunding, Series 1992,
G.O. ............................................ 8.100 12/01/11 525,605
145 Pocahontas, Iowa, Industrial Development Rev.
(Navistar International Harvester Co.)........... 10.250 10/01/00 150,986
</TABLE>
See Notes to Financial Statements
D-7
<PAGE> 82
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Port of New Orleans, Louisiana, IDR, Refunding
(Avondale Industries, Inc.)...................... 8.250 06/01/04 1,063,900
2,330 Somerset County, Pennsylvania, General Authority,
Commonwealth Lease Rev., FGIC.................... 6.250 10/15/11 2,474,693
1,705 St. Charles, Illinois, Industrial Development
Rev. (Tri-City Center Project)................... 7.500 11/01/13 1,707,302
500 Texas General Services, Community Partner
Interests,
(Office Building and Land Acquisition Project)... 7.000 08/01/19 513,320
500 Texas General Services, Community Partner
Interests,
(Office Building and Land Acquisition Project)... 7.000 08/01/24 513,320
1,000 Texas State, Refunding (Superconducting Project),
Series C, G.O. .................................. 5.500 04/01/20 922,340
1,000 Utah State Building Ownership Authority Lease
Rev.
(Dept. of Employment Security) 7.800 08/15/10 1,090,020
1,300 Utah State Building Ownership Authority Lease
Rev.
(Dept. of Employment Security)................... 7.800 08/15/11 1,417,026
1,000 Valdez, Alaska, Marine Term Rev., Refunding
(Sohio Pipeline)................................. 7.125 12/01/25 1,073,550
1,250 Virginia, Port of Authority, Commonwealth........ 8.200 07/01/08 1,369,200
1,500 Woodward, Oklahoma, Municipal Auto Sales,
Refunding........................................ 8.000 11/01/12 1,629,645
------------
TOTAL MISCELLANEOUS.............................. 26,692,726
------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.2%
500 Eldridge Road, Texas, MUD, Refunding............. 6.125 03/01/11 479,860
500 Harris County, Texas, MUD, Refunding, G.O. ...... 7.300 03/01/14 508,790
1,000 Mills Road, Texas, MUD........................... 6.500 09/01/14 973,090
500 Mission Bend MUD No. 2, Texas.................... 10.000 09/01/98 567,845
375 Mission Bend MUD No. 2, Texas.................... 10.000 09/01/00 435,878
655 Montgomery County, Texas, MUD No. 4 (Water Works
System).......................................... 8.900 09/01/02 737,117
500 North Mission Glen, Texas, MUD, Refunding........ 6.500 09/01/14 482,360
------------
TOTAL MUD........................................ 4,184,940
------------
NURSING HOMES 1.2%
500 Fairfield, Ohio, Economic Development Rev.,
Refunding
(Beverly Enterprises) 8.500 01/01/03 525,595
475 Louisiana Public Facilities Authority, Industrial
Development Rev., Refunding (Beverly
Enterprises)..................................... 8.250 09/01/08 500,740
</TABLE>
See Notes to Financial Statements
D-8
<PAGE> 83
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,315 Luzerne County, Pennsylvania, Industrial
Development Authority, 1st Mtg. Rev., Refunding
(Birchwood Nursing Center Project), Series-A..... 7.875 12/01/13 1,377,620
1,555 New Hampshire Health & Higher Educational
Facility Authority Rev., Refunding 1st Mtg. Odd
Fellows Home..................................... 8.800 06/01/09 1,698,635
------------
TOTAL NURSING HOMES.............................. 4,102,590
------------
POLLUTION CONTROL REVENUE (PCR) 5.6%
3,675 Brazos River Authority, Texas, PCR (Texas
Utilities Electric Co. Project A)................ 9.875 10/01/17 4,074,031
1,000 Burke County, Georgia, Development Authority, PCR
(Georgia Power Co.).............................. 9.375 12/01/17 1,115,390
1,000 Burlington, Kansas, PCR, MBIA (Kansas Gas &
Electric Co. Project)............................ 7.000 06/01/31 1,050,940
1,595 Capital Industrial Development Corp., Texas, PCR
(International Business Machines Corp.).......... 7.400 05/01/12 1,749,683
750 County of Coshocton, Ohio, Solid Waste Disposal
Rev. (Stone Container Corp. Project), Series
1992............................................. 7.875 08/01/13 753,022
1,000 Hodge, Louisiana, Utility Rev. (Stone Container
Corp. Project), Series 1990...................... 9.000 03/01/10 1,063,530
1,240 Mercer County, North Dakota, PCR, Basin Electric
Power, Series E.................................. 7.000 01/01/19 1,274,174
500 Monroe County, Michigan, PCR (Detroit Edison
Co.), Series A................................... 10.500 12/01/16 531,290
1,000 New Hampshire State Industrial Development
Authority, PCR, New England Power Co. ........... 7.800 04/01/16 1,042,090
1,000 New Hampshire State Industrial Development
Authority, PCR, United Illuminating Co., Series
B................................................ 10.750 10/01/12 1,140,690
1,000 Parish of St. Charles, Louisiana, PCR (Louisiana
Power & Light Co.)............................... 8.250 06/01/14 1,068,750
1,400 Parish of West Feliciana, Louisiana, PCR (Gulf
States Utilities), Series A...................... 7.500 05/01/15 1,432,634
1,000 Petersburg, Indiana, PCR, Refunding (Indianapolis
Power & Lighting), Series 1993-A................. 6.100 01/01/16 981,440
750 Pope County, Arkansas, PCR (Arkansas Power &
Light Project)................................... 11.000 12/01/15 792,983
</TABLE>
See Notes to Financial Statements
D-9
<PAGE> 84
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,350 Sabine River Authority, Texas, Refunding, PCR
(Texas Utilities Co. Project).................... 7.750 04/01/16 1,404,338
440 Sabine River Authority, Texas, Refunding, PCR
(Texas Utilities Co. Project), Series 1986....... 9.000 09/01/07 482,090
------------
TOTAL PCR........................................ 19,957,075
------------
POOL FINANCING PROGRAMS 2.9%
1,750 Emmaus, Pennsylvania, General Authority, Local
Government Bond Pool Program, Rev., Series A,
BIG.............................................. 8.150 05/15/18 1,881,215
2,500 Emmaus, Pennsylvania, General Authority, Local
Government Bond Pool Program, Rev., Series C,
BIG.............................................. 7.900 05/15/18 2,669,750
1,000 Indianapolis, Indiana, Local Public Improvement,
Series A......................................... 6.000 02/01/20 967,350
2,000 Indianapolis, Indiana, Local Public Improvement,
Series C......................................... 6.700 01/01/17 2,010,220
450 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.500 02/01/22 450,410
550 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.750 02/01/14 579,502
1,000 Indianapolis, Indiana, Local Public Improvement,
Series D......................................... 6.750 02/01/20 1,024,400
670 Tampa, Florida, Capital Improvement Program Rev.,
Series A......................................... 8.250 10/01/18 700,237
------------
TOTAL POOL FINANCING PROGRAMS.................... 10,283,084
------------
RESOURCE RECOVERY 2.7%
1,760 Broward County, Florida, Resource Recovery Rev.,
North Project.................................... 7.950 12/01/08 1,920,389
2,295 Broward County, Florida, Resource Recovery Rev.,
South Project.................................... 7.950 12/01/08 2,501,206
1,000 Camden County, New Jersey, PCR, Solid Waste
Resource Recovery Rev., Series B................. 7.500 12/01/09 960,440
1,500 Delaware County, Pennsylvania, Industrial
Development Authority Rev. (Resource Recovery
Project)......................................... 8.100 12/01/13 1,588,005
1,000 El Centro, California, Certificates of
Participation.................................... 7.000 06/01/19 975,990
1,000 Montgomery County, Pennsylvania, Industrial
Development Authority Rev., Resource Recovery.... 7.500 01/01/12 1,054,390
</TABLE>
See Notes to Financial Statements
D-10
<PAGE> 85
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500 Rockdale County, Georgia, Development Authority
Rev. Solid Waste Disposal (Visy Paper, Inc.
Project)......................................... 7.500 01/01/26 504,685
------------
TOTAL RESOURCE RECOVERY.......................... 9,505,105
------------
SALES TAX REVENUE 1.5%
1,000 Crestwood, Illinois, Tax Increment Rev.,
Refunding........................................ 7.250 12/01/08 986,250
1,000 Edgewater, Colorado, Redevelopment Rev........... 6.750 12/01/08 1,009,710
1,000 Orange County, Florida, Tourist Development Tax
Rev., AMBAC...................................... 6.000 10/01/16 1,000,930
865 Round Lake Beach, Illinois, Tax Increment Rev.,
Series 1993...................................... 7.200 12/01/04 858,954
500 Round Lake Beach, Illinois, Tax Increment Rev.,
Series 1993...................................... 7.500 12/01/13 448,390
975 St. Louis, Missouri, Tax Increment Rev. (Scullin
Redevelopment Area), Series A.................... 10.000 08/01/10 1,144,367
------------
TOTAL SALES TAX REVENUE.......................... 5,448,601
------------
TRANSPORTATION 9.7%
3,000 Atlanta, Georgia, Airport Facilities Rev.
(Atlanta International Airport), Series 1990..... 6.250 01/01/21 2,946,900
1,000 Chicago, Illinois, O'Hare International Airport
Rev., Series A................................... 6.000 01/01/18 940,910
1,000 Chicago, Illinois, O'Hare International Airport
Rev., Series B................................... 6.000 01/01/18 940,910
500 Cleveland, Ohio, Parking Facilities Improvement
Rev. ............................................ 8.000 09/15/12 523,230
940 Dallas-Fort Worth, Texas, International Airport
Facility Rev., (American Airlines, Inc.)......... 7.500 11/01/25 955,623
2,500 Greater Orlando Aviation Authority, Florida,
Airport Facilities Rev. ......................... 8.375 10/01/16 2,746,558
500 Hawaii State Harbor Capital Improvement Rev.,
MBIA............................................. 7.000 07/01/17 525,685
2,000 Indiana Transportation Finance Authority, Airport
Facilities Lease Rev., Series A.................. 6.250 11/01/16 1,962,720
1,000 Kentucky State Turnpike Authority, Toll Road
Rev., Refunding Series A......................... 5.500 07/01/07 967,900
8,000 Kentucky State Turnpike Authority, Toll Road
Rev.,
Refunding Series 1987-A.......................... 5.000 07/01/08 7,261,520
2,000 Los Angeles, California, Regional Airport
Facility Improvement Corp., Lease Rev. .......... 11.250 11/01/25 2,138,200
</TABLE>
See Notes to Financial Statements
D-11
<PAGE> 86
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,500 Metropolitan Transportation Authority, New York
Transportation Facilities, Rev., Series G,
MBIA............................................. 5.500 07/01/15 1,419,315
1,000 New Hampshire State Turnpike System, Rev.,
Refunding Series A, FGIC......................... 6.750 11/01/11 1,087,400
3,200 New Jersey State Turnpike Authority, Series C.... 6.500 01/01/16 3,372,416
1,000 Port Authority of New York and New Jersey,
Consolidated Board, 95th Series.................. 6.125 07/15/22 997,250
915 Philadelphia, Pennsylvania, Industrial
Development Authority Rev. (Parking Garage II
Project)......................................... 6.125 02/15/03 907,049
1,000 St. Louis, Missouri, Parking Facilities Rev. .... 6.625 12/15/21 1,007,690
1,000 Triborough Bridge & Tunnel Authority, New York,
Rev. ............................................ 7.875 01/01/18 1,093,430
1,000 Tulsa, Oklahoma, Municipal Airport Trust,
Rev. ............................................ 7.600 12/01/30 986,530
800 Tulsa, Oklahoma, Municipal Airport Trust, Rev.
(American Airlines).............................. 9.500 06/01/20 832,968
785 Virgin Islands Port Authority, Marine Division
Rev.
(Marine Terminal), Series A...................... 10.125 11/01/05 811,737
------------
TOTAL TRANSPORTATION............................. 34,425,941
------------
UTILITIES -- COMBINATION ELECTRIC, GAS AND/OR
WATER 9.7%
1,250 Austin, Texas, Utility System Rev., FGIC......... 7.750 11/15/06 1,316,662
2,280 Austin, Texas, Utility System Rev., Refunding.... 6.000 05/15/15 2,258,796
1,000 Austin, Texas, Utility System Rev., Series A..... 7.800 11/15/12 1,112,940
2,380 Austin, Texas, Utility System Rev., Series B..... 7.800 11/15/12 2,631,209
1,000 Chicago, Illinois, Gas Supply Rev.
(People's Gas Lighting and Coke Co.), Series A... 8.100 05/01/20 1,103,260
1,000 Chicago, Illinois, Metropolitan Water District,
G.O. ............................................ 7.000 01/01/11 1,122,700
700 Citronelle, Alabama, Utilities Board, Water,
Sewer & Gas Rev. ................................ 9.000 05/01/13 752,171
10,950 Jefferson County, Kentucky, Capital Project Lease
Rev. Waste Water Treatment Plant................. * 08/15/14 2,931,315
750 Jefferson, Wisconsin, Sewer System, Waterworks... 7.400 07/01/16 840,397
2,000 Los Angeles, California, Dept. of Water & Power,
Electric Plant Rev. ............................. 5.375 09/01/23 1,776,940
2,000 Massachusetts State Water Resource Authority,
Series A......................................... 7.500 04/01/16 2,243,440
</TABLE>
See Notes to Financial Statements
D-12
<PAGE> 87
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 New Hampshire State Business Finance Authority,
Electric Facilities Rev.
(Plymouth Cogeneration Light Power).............. 7.750 06/01/14 1,006,120
1,000 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series A........... 7.625 06/15/16 1,075,680
3,000 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series A, MBIA..... 7.250 06/15/15 3,352,200
4,100 New York City Municipal Water Finance Authority,
New York, Water & Sewer Rev., Series B........... 5.000 06/15/17 3,510,584
1,000 New York State Environment Facilities Corp.,
Water Facilities Rev. (Long Island Water
Corp.)........................................... 10.000 10/01/17 1,108,110
500 NORCO, California, Sewer and Water Rev.,
Refunding........................................ 6.700 10/01/13 489,130
500 NORCO, California, Sewer and Water Rev.,
Refunding........................................ 7.200 10/01/19 493,770
750 Northwest Harris County, Texas, Municipal
Utility, Waterworks and Sewer System Combination
Tax.............................................. 8.100 10/01/15 809,610
2,000 Orlando, Florida, Utilities Commission, Water &
Electric Rev. Refunding (Prerefunded @
10/01/95)........................................ 8.625 10/01/05 2,081,240
500 Willow Fork, Texas, Drainage District, G.O. ..... 7.000 03/01/12 517,080
500 Willow Fork, Texas, Drainage District, G.O. ..... 7.000 03/01/13 514,270
1,000 Winters, Texas, Water Works & Sewer Rev. ........ 8.500 08/01/17 1,219,240
------------
TOTAL UTILITIES -- COMBINATION ELECTRIC, GAS
AND/OR WATER..................................... 34,266,864
------------
UTILITIES -- ELECTRIC 23.2%
2,500 Alaska Energy Authority Power Rev., First Series
(Bradley Lake Hydroelectric Project), BIG........ 6.250 07/01/21 2,502,475
850 Georgia State Municipal Electric Authority, Power
Rev. ............................................ 6.000 01/01/20 817,114
2,000 Georgia State Municipal Electric Authority, Power
Rev., Series A (Prerefunded 01/01/96)............ 7.875 01/01/18 2,086,560
1,750 Georgia State Municipal Electric Authority, Power
Rev., Series Q (Prerefunded 01/01/98)............ 8.375 01/01/16 1,927,730
1,250 Georgia State Municipal Electric Authority, Power
Rev., Series O................................... 8.125 01/01/17 1,358,250
9,685 Grand River Dam Authority, Oklahoma, Rev. Series
1987............................................. 5.000 06/01/12 8,598,052
1,850 Intermountain Power Agency, Utah, Power Supply
Authority Rev., 1st Crossover Series............. 5.000 07/01/16 1,597,419
</TABLE>
See Notes to Financial Statements
D-13
<PAGE> 88
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series A......................... 6.000 07/01/23 965,630
2,400 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series A......................... 7.750 07/01/17 2,536,824
3,650 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series B......................... 7.750 07/01/20 3,917,070
2,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series H......................... 6.000 07/01/21 1,920,740
2,000 Intermountain Power Agency, Utah, Power Supply
Authority Rev., Series I......................... 6.000 07/01/21 1,920,740
1,000 Lewis County, Washington, Public Utility District
No. 1 Rev. (Cowlitz Falls Hydroelectric
Project)......................................... 6.000 10/01/24 966,510
750 Michigan Public Power Agency, Rev., Refunding
(Belle River Project)............................ 7.000 01/01/18 770,467
3,000 Muscatine, Iowa, Electric Authority Rev. ........ 5.000 01/01/08 2,700,330
2,500 New York State Power Authority, Rev., Series T... 7.375 01/01/18 2,601,950
300 Northern California, Public Power Agency,
Rev. ............................................ 5.000 07/01/09 260,835
335 North Carolina Eastern Municipal Power Agency,
Power System Rev. ............................... 8.000 01/01/21 367,971
2,665 North Carolina Eastern Municipal Power Agency,
Power System Rev. (Prerefunded @ 1/1/98)......... 8.000 01/01/21 2,927,289
7,695 North Carolina Eastern Municipal Power Agency,
Power System Rev., Series A...................... 4.500 01/01/24 6,140,379
1,000 North Carolina Municipal Power Agency No. 1,
Catawba Electric Rev. ........................... 6.000 01/01/20 948,150
2,850 North Carolina Municipal Power Agency No. 1,
Catawba Electric Rev. ........................... 7.875 01/01/19 3,121,064
1,070 Piedmont Municipal Power Agency, South Carolina,
Rev. ............................................ 5.000 01/01/25 870,552
5,290 Salt River Project, Arizona Agricultural
Improvement & Power District Electric System
Rev. ............................................ 7.875 01/01/28 5,785,938
1,000 Sam Rayburn, Texas, Municipal Power Agency,
Refunding, Series A.............................. 6.250 10/01/17 864,160
1,000 Sam Rayburn, Texas, Municipal Power Agency,
Refunding, Series A.............................. 6.750 10/01/14 942,280
1,000 South Carolina, Public Service Authority
(Prerefunded @ 1/1/96)........................... 7.875 07/01/21 1,036,228
</TABLE>
See Notes to Financial Statements
D-14
<PAGE> 89
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2,000 Southern Minnesota Municipal Power Agency,
Power Supply System Rev., Series A............... 5.000 01/01/16 1,730,140
1,250 Southern Minnesota Municipal Power Agency,
Power Supply System Rev., Series C............... 5.000 01/01/17 1,077,400
8,565 Texas Municipal Power Agency Rev. ............... 5.500 09/01/13 7,990,289
1,250 Washington State Public Power Supply System Rev.,
Nuclear Project No. 1, Series B.................. 7.125 07/01/16 1,350,525
445 Washington State Public Power Supply System Rev.,
Nuclear Project No. 1, Series D.................. 15.000 07/01/17 513,294
2,500 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series B.................. 7.000 07/01/12 2,589,975
1,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series B.................. 7.375 07/01/12 1,120,120
2,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 2, Series 1990-C............. 7.625 07/01/10 2,276,020
3,000 Washington State Public Power Supply System Rev.,
Nuclear Project No. 3, MBIA...................... 5.600 07/01/17 2,773,770
------------
TOTAL UTILITIES -- ELECTRIC...................... 81,874,240
------------
TOTAL MUNICIPAL BONDS (Cost $316,710,927)........ 337,510,328
------------
MUNICIPAL VARIABLE RATE DEMAND NOTES+ 2.9%
540 Anchorage, Alaska, Higher Education Rev. ........ 4.200 07/01/17 540,000
2,100 District Columbia, Series A-4.................... 4.750 10/01/07 2,100,000
2,000 District Columbia, Series A-6.................... 4.750 10/01/07 2,000,000
300 Illinois Health Facilities Authority Rev., La
Grand Memorial Health System..................... 4.600 12/01/16 300,000
900 Illinois Development Finance Authority Rev. ..... 4.200 04/01/07 900,000
750 Illinois Health Facilities Authority Rev. ....... 4.600 01/01/18 750,000
355 Jacksonville, Florida, Industrial Development
Rev. ............................................ 4.750 09/01/07 355,000
500 Maricopa County, Arizona, Industrial Development
Authority, Hospital Facility Rev., Series B-2.... 4.500 12/01/08 500,000
300 New York, New York, Subseries A-7, G.O. ......... 4.600 08/01/20 300,000
200 New York, New York, Subseries E-2, G.O. ......... 4.500 08/01/20 200,000
500 New York, New York, Subseries E-5, G.O. ......... 4.500 08/01/16 500,000
575 New York State Job Development Authority......... 4.500 03/01/07 575,000
200 Peninsula Ports, Virginia, Authority Rev., Port
Facilities....................................... 4.450 12/01/05 200,000
500 West Feliciana, Parish, Louisiana................ 4.750 04/01/16 500,000
</TABLE>
See Notes to Financial Statements
D-15
<PAGE> 90
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT ($)MARKET
($000) DESCRIPTION COUPON(%) MATURITY VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
500 Wisconsin State Health Facilities Authority Rev.,
Series A-2....................................... 4.100 01/01/16 500,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $10,220,000)............................... 10,220,000
------------
TOTAL INVESTMENTS (Cost $326,930,927) 98.5%........................................... 347,730,328
OTHER ASSETS AND LIABILITIES, NET 1.5%................................................ 5,299,458
------------
NET ASSETS 100%....................................................................... $353,029,786
============
</TABLE>
*Zero Coupon bond
+Interest rates are as of March 31, 1995
FHA -- Federal Housing Administration
G.O. -- General obligation bond
Rev. -- Revenue bond
IDR -- Industrial Revenue Bond
Insurers:
AMBAC -- AMBAC Indemnity Corp.
BIG -- Bond Investors Guaranty Insurance Co.
FGIC -- Financial Guaranty Insurance Corp.
FSA -- Financial Security Assurance Inc.
MBIA -- Municipal Bond Investor's Assurance Corp.
See Notes to Financial Statements
D-16
<PAGE> 91
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $326,930,927)............................... $347,730,328
Cash........................................................................... 63,719
Interest receivable............................................................ 6,874,209
Receivable for Fund shares sold................................................ 409,773
Receivable for investments sold................................................ 160,463
Other assets................................................................... 2,683
------------
Total Assets................................................................. 355,241,175
------------
LIABILITIES
Payable for Fund shares redeemed............................................... 923,890
Dividends payable.............................................................. 763,698
Due to Distributor............................................................. 217,909
Due to Adviser................................................................. 147,435
Deferred Director compensation................................................. 25,079
Accrued expenses............................................................... 133,378
------------
Total Liabilities............................................................ 2,211,389
------------
NET ASSETS, equivalent to $9.98 per share for Class A shares, $9.98 per share
for Class B shares and $9.99 per share for Class C shares.................... $353,029,786
===========
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 30,671,176 Class A, 3,922,453 Class B and 794,623 Class
C shares outstanding......................................................... $ 353,883
Capital surplus................................................................ 342,630,860
Accumulated net realized loss on securities.................................... (9,875,520)
Net unrealized appreciation of investments..................................... 20,799,401
Accumulated deficit............................................................ (878,838)
------------
NET ASSETS at March 31, 1995................................................... $353,029,786
===========
</TABLE>
See Notes to Financial Statements
D-17
<PAGE> 92
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................................................................ $12,361,124
-----------
EXPENSES
Management fees................................................................. 865,032
Service fees -- Class A......................................................... 299,675
Distribution and service fees -- Class B........................................ 186,720
Distribution and service fees -- Class C........................................ 38,876
Shareholder service agent's fees and expenses................................... 212,684
Accounting services............................................................. 66,960
Registration and filing fees.................................................... 51,672
Reports to shareholders......................................................... 32,076
Custodian fees.................................................................. 10,669
Audit fees...................................................................... 10,350
Directors' fees and expenses.................................................... 9,682
Legal fees...................................................................... 1,807
Miscellaneous................................................................... 6,781
-----------
Total expenses............................................................. 1,792,984
-----------
NET INVESTMENT INCOME........................................................... 10,568,140
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................................. (406,001)
Net unrealized appreciation of securities during the period..................... 5,430,649
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.................................. 5,024,648
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................ $15,592,788
==========
</TABLE>
See Notes to Financial Statements
D-18
<PAGE> 93
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1995 SEPTEMBER 30, 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period............................... $354,257,068 $355,682,180
------------ ------------
Operations
Net investment income....................................... 10,568,140 20,505,507
Net realized loss on securities............................. (406,001) (2,005,680)
Net unrealized appreciation (depreciation) of securities
during the period........................................ 5,430,649 (23,803,245)
------------ ------------
Increase (decrease) in net assets resulting from
operations............................................. 15,592,788 (5,303,418)
------------ ------------
Dividends to shareholders from net investment income
Class A..................................................... (9,121,444) (18,227,557)
Class B..................................................... (992,532) (1,534,981)
Class C..................................................... (205,815) (276,302)
------------ ------------
(10,319,791) (20,038,840)
------------ ------------
NET EQUALIZATION DEBITS (NOTE 1F)............................. -- (20,289)
------------ ------------
Capital transactions
Proceeds from shares sold
Class A..................................................... 14,727,341 49,766,921
Class B..................................................... 5,982,935 25,694,674
Class C..................................................... 1,089,358 9,071,276
------------ ------------
21,799,634 84,532,871
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A..................................................... 5,388,284 10,485,166
Class B..................................................... 608,782 958,506
Class C..................................................... 134,811 183,364
------------ ------------
6,131,877 11,627,036
------------ ------------
Cost of shares redeemed
Class A..................................................... (27,714,382) (60,814,520)
Class B..................................................... (5,310,821) (9,282,719)
Class C..................................................... (1,406,587) (2,125,233)
------------ ------------
(34,431,790) (72,222,472)
------------ ------------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM CAPITAL
TRANSACTIONS................................................ (6,500,279) 23,937,435
------------ ------------
DECREASE IN NET ASSETS........................................ (1,227,282) (1,425,112)
------------ ------------
NET ASSETS, end of period..................................... $353,029,786 $354,257,068
============ ============
</TABLE>
See Notes to Financial Statements
D-19
<PAGE> 94
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A(1)
----------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED SEPTEMBER 30
MARCH 31, ---------------------------------------------
1995 1994 1993(2) 1992 1991 1990
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period...... $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
-------- ------- ------ ------ ------- ------
INCOME FROM INVESTMENT OPERATIONS:
Investment income....................... .35 .68 .69 .705 .71 .72
Expenses................................ (.05) (.09) (.094) (.09) (.08) (.08)
-------- ------- ------ ------ ------- ------
Net investment income..................... .30 .59 .596 .615 .63 .64
Net realized and unrealized gains or
losses on securities.................... .1555 (.7255) .558 .349 .5198 (.195)
-------- ------- ------ ------ ------- ------
Total from investment operations.......... .4555 (.1355) 1.154 .964 1.1498 .445
-------- ------- ------ ------ ------- ------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.2955) (.5745) (.596) (.624) (.6398) (.645)
Distributions in excess of book-basis
net investment income(3)............. -- -- (.008) -- -- --
-------- ------- ------ ------ ------- ------
Total distributions....................... (.2955) (.5745) (.604) (.624) (.6398) (.645)
-------- ------- ------ ------ ------- ------
Net asset value, end of period............ $ 9.98 $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13
======== ======= ====== ====== ======= ======
TOTAL RETURN(4)........................... 4.76% (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)...... $ 306.0 $ 309.0 $332.3 $292.3 $ 266.9 $237.4
Average net assets (millions)............. $ 300.9 $ 324.2 $313.0 $278.6 $ 253.2 $241.2
Ratios to average net assets (annualized):
Expenses................................ .93% .93% .91% .90% .89% .86%
Net investment income................... 6.23% 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate................... 2% 6% 3% 6% 10% 17%
</TABLE>
- ---------------
(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1 stock
split effected July 26, 1991. Additionally, in 1991, the Fund adopted for
financial reporting purposes a method of accounting for debt discounts and
premiums which is the same as is used for federal income tax reporting. The
effect of the change, on a pro forma basis, would have been to increase net
investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amount of $.01 for 1990. Similarly, the
ratio of net investment income to average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information was not restated.
(4) Total return for a period of less than one full year is not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements
D-20
<PAGE> 95
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B(1) CLASS C
---------------------------------- ------------------------------------------
AUGUST 30,
SIX MONTHS YEAR ENDED SIX MONTHS 1993(5)
ENDED SEPTEMBER 30, ENDED YEAR ENDED THROUGH
MARCH 31, ------------------- MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1993(2) 1995 1994(2) 1993(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $ 9.83 $ 10.53 $ 9.98 $ 9.83 $ 10.54 $ 10.53
-------- ------- ------- -------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Investment income.................. .35 .68 .685 .35 .69 .05
Expenses........................... (.09) (.17) (.175) (.09) (.18) (.015)
-------- ------- ------- -------- ------- -------
Net investment Income................ .26 .51 .51 .26 .51 .035
Net realized and unrealized gains or
losses on securities............... .1485 (.7195) .564 .1585 (.7295) .061
-------- ------- ------- -------- ------- -------
Total from investment operations..... .4085 (.2095) 1.074 .4185 (.2195) .096
-------- ------- ------- -------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment
income........................... (.2585) (.4905) (.501) (.2585) (.4905) (.007)
Distributions in excess of
book-basis net investment
income(3)........................ -- -- (.023) -- -- (.079)
-------- ------- ------- -------- ------- -------
Total distributions.................. (.2585) (.4905) (.524) (.2585) (.4905) (.086)
-------- ------- ------- -------- ------- -------
Net asset value, end of period....... $ 9.98 $ 9.83 $10.53 $ 9.99 $ 9.83 $ 10.54
======== ======= ====== ======== ======= =======
TOTAL RETURN(4)...................... 4.25% (2.13)% 11.15% 4.25% (2.03)% .91.%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions)......................... $ 39.1 $ 37.2 $ 22.1 $ 7.9 $ 8.0 $ 1.3
Average net assets (millions)........ $ 37.3 $ 31.2 $ 10.0 $ 7.8 $ 5.4 $ 0.4
Ratios to average net assets
Expenses........................... 1.74%(6) 1.72% 1.71% 1.74%(6) 1.72% 1.69%(6)
Net investment income.............. 5.42%(6) 5.00% 4.96% 5.42%(6) 5.03% 4.25%(6)
Portfolio turnover rate.............. 2% 6% 3% 2% 6% 3%
</TABLE>
- ---------------
(1) Sales of Class B commenced September 29, 1992 at a net asset value of $10.00
per share. At September 30, 1992, there were 50 Class B shares outstanding
with a per share net asset value of $9.98. The decrease in net asset value
was due principally to a dividend of $.052 per share. Other financial
highlights for Class B shares for this short period (September 29, 1992 to
September 30, 1992) are not presented as they are not meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(5) Commencement of offering of sales.
(6) Annualized
See Notes to Financial Statements
D-21
<PAGE> 96
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
American Capital Municipal Bond Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS -- Investments in municipal bonds are valued at
the most recently quoted bid prices or at bid prices based on a matrix system
(which considers such factors as security prices, yields, maturities and
ratings) furnished by dealers and an independent pricing service. Municipal
variable rate demand notes are valued at par; periodic rate changes reflect
current market conditions.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued based
on market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. At March 31, 1995, debt securities rated below investment
grade and comparable unrated securities represented approximately 20% of the
investment portfolio.
B. FEDERAL INCOME TAXES -- No provision for federal income taxes is
required because the Fund has elected to be taxed as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code") and
intends to maintain this qualification by annually distributing all of its
taxable net investment income and taxable net realized capital gains to its
shareholders. It is anticipated that no distributions of net realized capital
gains will be made until tax basis capital loss carryforwards expire or are
offset by net realized capital gains.
The net realized capital loss carryforward for federal income tax purposes
of approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME -- Investment
transactions are accounted for on the trade date. Realized gains and losses on
investments are determined on the basis of identified cost. Interest income is
accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions to
shareholders are recorded on the record date. The Fund distributes tax basis
earnings in accordance with the minimum distribution require-
D-22
<PAGE> 97
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
ments of the Code, which may differ from generally accepted accounting
principles. Such dividends or distributions may exceed financial statement
earnings.
E. DEBT DISCOUNT AND PREMIUM -- The Fund accounts for debt discounts and
premiums on the same basis as is followed for federal income tax reporting.
Accordingly, original issue discounts and all premiums are amortized over the
life of the security. Market discounts are recognized at the time of sale as
realized gains for book purposes and ordinary income for tax purposes.
F. EQUALIZATION -- At September 30, 1994, the Fund discontinued the
accounting practice of equalization, which it had used since its inception.
Equalization is a practice whereby a portion of the proceeds from sales and
costs of redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or credited to
undistributed net investment income.
G. WHEN-ISSUED SECURITIES -- Delivery and payment for securities purchased
on a when-issued basis may take place up to 45 days after the date of the
transaction. The securities purchased are subject to market fluctuation during
this period. To meet the payment obligation, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.
NOTE 2 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Van Kampen American Capital Asset Management, Inc. (the "Adviser") serves
as investment manager of the Fund. Management fees are paid monthly, based on
the rate of .50% per annum of the average daily net assets of the Fund.
Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among investment companies advised or sub-advised by the Adviser. For
the period March 31, 1995, these charges included $5,384 as the Fund's share of
the employee costs attributable to the Fund's accounting officers. A portion of
the accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services provided by the Adviser are at
cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent. These services are provided at
cost plus a profit. For the period ended March 31, 1995, the fees for such
services were $147,187.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retailer Dealer") both
affiliates of the Adviser, received $27,527 and $30,555, respectively, as their
portion of the commissions charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average net assets to reimburse the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average daily net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At March 31, 1995, the unreimbursed expenses incurred
by the Distributor under the Class B and Class C plans aggregated approximately
D-23
<PAGE> 98
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
$1.5 million and $110,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a Trustee of the Fund.
Certain officers and directors of the Fund are officers and directors of
the Adviser, the Distributor, the Retail Dealer and the shareholder services
agent.
NOTE 3 -- INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $8,215,930 and $12,451,313,
respectively.
For federal income tax purposes, the identified cost of investments owned
at March 31, 1995 was $326,964,141. Net unrealized appreciation of investments
aggregated $20,766,187, gross unrealized appreciation of investments aggregated
$23,399,469, and gross unrealized depreciation of investments aggregated
$2,633,282.
NOTE 4 -- DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $1,250 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $470. During the period, such fees aggregated $7,453.
The directors may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered by the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.
NOTE 5 -- CAPITAL
The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
D-24
<PAGE> 99
AMERICAN CAPITAL MUNICIPAL BOND FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
(Unaudited)
The Fund has 200 million shares of each class of shares of $.01 par value
of capital stock authorized. Transactions in shares of capital stock were as
follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................................ 1,519,426 4,883,618
Class B............................................................ 617,796 2,518,998
Class C............................................................ 110,152 884,668
---------- -------------
2,247,374 8,287,284
---------- -------------
Shares issued for dividends reinvested
Class A............................................................ 554,575 1,032,887
Class B............................................................ 62,597 94,773
Class C............................................................ 13,854 18,175
---------- -------------
631,026 1,145,835
---------- -------------
Shares redeemed
Class A............................................................ (2,866,089) (6,004,203)
Class B............................................................ (549,554) (915,403)
Class C............................................................ (143,583) (210,194)
---------- -------------
(3,559,226) (7,129,800)
---------- -------------
Increase (decrease) in shares outstanding............................ (680,826) 2,303,319
========= ==========
</TABLE>
NOTE 6 -- SUBSEQUENT DIVIDENDS
The Board of Directors of the Fund declared a dividend of $.05 per share
for Class A shares, $.044 per share for Class B and Class C shares from net
investment income, payable May 15, 1995 to shareholders of record on April 28,
1995.
D-25
<PAGE> 100
APPENDIX E
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds
Alabama 2.7%
$ 2,805 Alabama Higher Edl Ln Corp ..................................... AAA Aaa 6.000% 9/01/07 $ 2,722,477
2,100 Alabama St Indl Dev Auth Rev Var Rate Cpn ..................... NR NR 7.500 9/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A (AMBAC Insd) ............... AAA Aaa 6.750 8/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec Inds Inc Rfdg . NR NR 6.500 2/15/09 4,489,851
1,225 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.000 9/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.500 9/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.000 8/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.250 8/01/18 880,738
------------
17,907,001
------------
Alaska 1.6%
5,690 Kasaan, AK Lease Rev ........................................... A- Baa1 8.000 8/15/16 5,979,507
8,000 North Slope Borough, AK Cap Appreciation Ser B
(Cap Gar Insd) ................................................. AAA Aa * 6/30/04 4,389,840
------------
10,369,347
------------
Arizona 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj ... NR Ba1 * 10/01/12 964,750
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A
(Prerefunded @ 07/01/00) ...................................... BB NR 9.500 7/01/10 6,119,458
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent Inc . A- Baa1 8.700 9/01/19 7,697,480
------------
14,781,688
------------
Arkansas 1.0%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser A <F3> ................................... NR NR 9.750 7/01/12 3,440,630
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser B <F3> ................................... NR NR 9.750 7/01/12 3,440,630
------------
6,881,260
------------
California 9.3%
6,880 California Edl Fac Auth Rev College Of Osteopathic Med Pacific NR NR 7.500 6/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev Kaiser Permanente Med ........ AA Aa2 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison Susanville Ser D (Cap Guar Insd) .................... AAA Aaa 5.250 6/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 5.000 12/01/23 1,704,461
4,325 Delano, CA Ctfs Partn Ser A ................................... NR NR 9.250 1/01/22 4,649,375
1,000 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj Rfdg ..... NR NR 7.875 2/01/15 1,000,000
</TABLE>
See Notes to Financial Statements
E-1
<PAGE> 101
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$10,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi
Cap Fac Proj IV (MBIA Insd) ..................................... AAA Aaa 5.000% 12/01/08 $ 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.900 12/01/26 836,100
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/05 570,680
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/10 323,415
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/11 268,584
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/12 219,156
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/13 204,295
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/14 190,358
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1 Aliso Viejo
Ser A (Prerefunded @ 08/15/02) .................................. AAA NR 7.350 8/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease Rev Ser A Rfdg (AMBAC Insd) .. AAA Aaa 5.400 11/01/20 5,799,500
1,000 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg .................... NR NR 7.000 9/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice Cent Proj Ser A Rfdg NR Baa1 5.900 9/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj Ser C Rfdg (AMBAC Insd) .... AAA Aaa 5.250 9/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc Rev Yorba Linda Redev Proj
Ser A (MBIA Insd) ............................................... AAA Aaa * 9/01/19 951,650
------------
61,607,737
------------
Colorado 7.2%
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A ........................ AAA Aaa 8.875 8/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A
(Prerefunded @ 08/01/10) ......................................... AAA Aaa 8.875 8/01/11 3,434,668
3,900 Colorado Hlth Fac Auth Rev Hosp North CO Med Cent (MBIA Insd) ..... AAA Aaa 6.000 5/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1 Ser A Rfdg ................... A+ A * 12/01/06 4,565,145
3,690 Jefferson Cnty, CO Residential Mtg Rev ............................ AAA Aaa 11.500 9/01/12 5,553,856
</TABLE>
See Notes to Financial Statements
E-2
<PAGE> 102
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Colorado (Continued)
$ 5,000 Meridian Metro Dist CO Peninsular & Oriental Steam
Navig Co Rfdg .................................................. NR A3 7.500% 12/01/11 $ 5,121,750
5,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ......... AAA Aaa 6.400 11/15/22 4,891,450
------------
47,583,432
------------
Connecticut 1.0%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home
Pgm AHF/Hartford ................................................ AA- A1 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A ............................................. AA- Aa 5.500 3/15/10 1,839,160
------------
6,885,251
------------
District of Columbia 0.6%
4,000 District of Columbia Ctfs Partn .................................. BBB NR 7.300 1/01/13 3,808,240
------------
Florida 3.4%
3,000 Emerald Coast, FL Hsg Corp Hsg Rev Ser A 1991 .................... NR NR 9.500 1/01/22 3,000,000
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev Environmental
Preservation 2000 Ser A .......................................... AAA Aaa 4.750 7/01/10 4,114,850
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/05 796,527
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown Cogeneration
Proj A Rfdg (AMBAC Insd) ......................................... BBB- Baa3 7.875 12/15/25 2,920,425
855 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A ............................................ BBB- NR 8.500 3/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A (Prerefunded @ 03/01/00) .................... AAA NR 8.500 3/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park ............................................ NR NR 10.000 7/01/22 4,420,486
------------
22,175,786
------------
Georgia 0.4%
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs Franklin Forest Ser A . NR NR 8.000 6/01/22 2,925,000
------------
Hawaii 3.6%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd) ................... AAA Aaa 6.350 7/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd) ..................................................... AAA Aaa 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.600 6/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.700 6/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.350 7/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.400 7/01/08 1,568,268
------------
23,416,754
------------
</TABLE>
See Notes to Financial Statements
E-3
<PAGE> 103
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Illinois 13.4%
$ 4,500 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq Proj.. NR NR 9.250% 2/01/12 $ 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr Lien ........................ NR NR 8.250 7/01/13 6,895,000
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser C1 (MBIA Insd) ............ AAA Aaa 5.750 1/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev Intl Terminal ......... AAA Aaa 6.750 1/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc ..... BB Baa3 8.500 5/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser A.. BB Baa2 8.400 5/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B.. BB Baa2 8.950 5/01/18 5,436,274
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/12 514,794
4,800 Hodgkins, IL Tax Increment ..................................... NR NR 9.500 12/01/09 5,184,000
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A ........ NR NR 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B ........ NR NR 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ............ BBB Baa1 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00) ...................................... AAA NR 9.500 11/15/15 512,512
1,150 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj ................ NR Baa1 6.700 3/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A.. BB- Ba 10.250 2/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.250 8/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.375 8/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United Med Cent
(Prerefunded @ 07/01/01) ....................................... NR NR 8.375 7/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg) ...... A+ Aa 9.086 2/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic Cent Ser B (AMBAC Insd) .... AAA Aaa * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A (AMBAC Insd) ....................... AAA Aaa 8.000 6/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins Res Recovery
Partners Ser A ................................................. NR NR 9.250 10/15/14 7,216,230
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd) ....... AAA Aaa 5.800 4/01/10 1,381,692
------------
88,479,962
------------
</TABLE>
See Notes to Financial Statements
E-4
<PAGE> 104
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Indiana 0.9%
$ 2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc ........... NR A1 7.000% 7/01/12 $ 2,770,818
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal Express
Corp Proj ...................................................... BBB Baa2 7.100 1/15/17 2,874,510
------------
5,645,328
------------
Iowa 0.3%
25,000 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser A .............. AA Aaa * 9/01/16 2,214,250
------------
Kentucky 1.7%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg ............. NR NR 6.550 3/01/09 938,510
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds Inc ................... B+ Ba2 9.875 10/01/10 2,842,532
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj
(Inverse Fltg) (MBIA Insd) ....................................... AAA Aaa 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (Cap Guar Insd) ................................ AAA Aaa 6.125 2/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Collateralized) .......... AAA Aaa 7.450 1/01/23 2,190,924
------------
11,096,429
------------
Louisiana 0.8%
2,600 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985 .................................................... NR NR 10.000 12/31/00 2,672,644
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ..................... AAA Aaa * 2/01/15 2,407,600
------------
5,080,244
------------
Maine 0.5%
1,500 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.600 11/01/00 1,955,140
------------
3,420,190
------------
Maryland 1.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg ....................................................... NR NR 7.550 6/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac Auth Rev Kernan Hosp Issue
(Connie Lee Insd) ................................................ AAA NR 6.100 7/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid Waste Rev Montgomery Cnty
Res Recovery Proj Ser A .......................................... NR A 6.200 7/01/10 2,706,960
1,165 Rockville, MD Mtg Rev Summit Apts Proj Ser A Rfdg (MBIA Insd) .... AAA Aaa 5.625 7/01/19 989,353
------------
8,328,038
------------
Massachusetts 1.7%
1,665 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser A
(AMBAC Insd) ..................................................... AAA Aaa 7.000 1/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med Cent
Hosp Ser G (Embedded Swap) (MBIA Insd) ........................... AAA Aaa 5.000 7/01/13 3,398,262
</TABLE>
See Notes to Financial Statements
E-5
<PAGE> 105
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts (Continued)
$ 6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A .......................................................... NR B 5.750% 10/01/06 $ 4,272,000
2,000 Plymouth Cnty, MA Ctfs Partn Ser A ............................. A- NR 7.000 4/01/22 2,005,280
------------
11,362,670
------------
Michigan 1.4%
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson Hlthcare
Ser A Rfdg (AMBAC Insd) .......................................... AAA Aaa 6.250 7/01/12 1,925,960
2,470 Michigan St Hosp Fin Auth Rev Garden City Hosp ................... BBB- Ba 8.300 9/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B
(Embedded Swap) (AMBAC Insd) ..................................... AAA Aaa 2.870 4/01/04 4,532,416
2,390 Romulus, MI Cmnty Sch Rfdg (FGIC Insd) ........................... AAA Aaa * 5/01/19 465,190
------------
9,400,976
------------
Minnesota 0.2%
8,160 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A
(MBIA Insd) ...................................................... AAA Aaa * 1/01/22 1,351,949
------------
Mississippi 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev Var
Weyerhaeuser Co Rfdg (Inverse Fltg) .............................. A A2 6.560 4/01/22 4,706,600
------------
Missouri 2.6%
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt ................................................. NR NR 7.125 8/15/12 2,001,660
1,890 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/04 2,014,570
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Hlth Midwest Ser B
(MBIA Insd) ...................................................... AAA Aaa 6.250 2/15/22 3,790,200
3,000 Missouri St Hlth & Edl Fac Rev Freeman Hosp Proj Ser A ........... AAA Aaa 5.375 2/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev
Mary Queen & Mother Proj Rfdg .................................... NR Aaa 7.125 3/20/23 2,213,258
------------
16,830,355
------------
Montana 0.8%
6,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj . NR NR 7.000 12/31/19 5,373,240
------------
Nebraska 1.2%
5,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.963 9/15/23 4,998,500
850 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.293 9/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 10.542 9/10/30 1,892,250
------------
7,639,812
------------
Nevada 2.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC Insd) ..... AAA Aaa 6.700 6/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp Ser A ............. BBB- Baa3 6.500 12/01/33 5,403,970
</TABLE>
See Notes to Financial Statements
E-6
<PAGE> 106
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nevada (Continued)
$ 2,500 Henderson, NV Loc Impt Dist No T-4 Ser A ..................... NR NR 8.500% 11/01/12 $ 2,531,100
2,575 Humboldt Genl Hosp Dist NV ................................... NR Baa 6.125 6/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .. NR Baa 5.750 9/01/17 3,448,517
------------
17,637,235
------------
New Jersey 2.9%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (Inverse Fltg)
(MBIA Insd) .................................................... AAA Aaa 8.448 8/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) <F2> ............................................... AAA Aaa 5.800 7/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) .................................................... AAA Aaa 5.800 7/01/08 1,918,720
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj B Rfdg (MBIA Insd) .......................... AAA Aaa 6.250 6/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj C Rfdg (MBIA Insd) ......................... AAA Aaa 6.200 8/01/30 1,165,562
------------
19,363,091
------------
New Mexico 0.4%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan Regl
Med Cent Inc Proj .............................................. NR A 7.900 6/01/11 2,654,150
------------
New York 16.0%
4,945 Battery Park City Auth NY Rev Sr Ser A Rfdg ................... AA A1 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic Hosp Rev .................... NR NR 8.000 1/01/20 3,583,155
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper
Corp Recycling ................................................ NR NR 8.000 1/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter Fac Rev Ser A (MBIA Insd) . AAA Aaa 6.100 7/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5 Rfdg ... BBB Baa1 7.000 7/01/12 5,025,350
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal One
Group Assn Proj ............................................... A A 6.000 1/01/19 4,355,000
4,000 New York City Muni Wtr Fin Auth ............................... A- A 5.625 6/15/11 3,520,600
20,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev (MBIA Insd) . AAA Aaa 5.350 6/15/12 17,209,000
2,500 New York City Ser B ........................................... A- Baa1 7.500 2/01/07 2,606,625
5,000 New York City Ser C Rfdg ...................................... A- Baa1 6.500 8/01/04 4,938,050
7,500 New York City Ser C Subser C-1 ................................ A- Baa1 7.500 8/01/20 7,692,225
5,000 New York City Ser H ........................................... A- Baa1 7.000 2/01/16 4,931,850
2,580 New York City Ser H Subser H-1 ................................ A- Baa1 4.900 8/01/97 2,505,232
14,600 New York St Dorm Auth Rev City Univ 3rd Genl Resources
Ser E (MBIA Insd) ............................................. AAA Aaa 6.750 7/01/24 14,634,602
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) . A A1 8.041 4/01/20 1,990,625
</TABLE>
See Notes to Financial Statements
E-7
<PAGE> 107
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York (Continued)
$ 2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara
Mohawk Pwr Corp Ser A Rfdg (FGIC Insd) ........................ AAA Aaa 7.200% 7/01/29 $ 2,072,800
7,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev NY St
Elec & Gas Corp Ser A Rfdg (MBIA Insd) ........................ AAA Aaa 6.050 4/01/34 6,371,120
490 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A ................................................... BBB+ Baa1 7.750 8/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A (Prerefunded @ 02/15/01) ........................... AAA Aaa 7.750 8/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs
Fac Ser C ..................................................... BBB+ Baa1 7.300 2/15/21 499,658
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C (Prerefunded @ 08/15/01) ................................ AAA Aaa 7.300 2/15/21 1,663,085
5,000 New York St Urban Dev Corp Rev Correctional Cap Fac
Ser A Rfdg (FSA Insd) ......................................... AAA Aaa 6.500 1/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St Fac ......................... BBB Baa1 7.500 4/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy Rev Proj Res Recovery Fac .. NR Baa 6.875 5/01/06 2,920,380
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy Proj ............ NR NR 8.000 3/15/22 1,021,980
-------------
105,759,358
-------------
North Dakota 0.3%
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp Proj ... BBB- NR 8.875 11/15/24 2,022,540
-------------
Ohio 2.3%
4,660 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys Ser B Rfdg ....... AA- A1 5.250 6/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) .... AAA Aaa 9.213 3/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG Fdg Ltd Partnership Proj Rfdg
(AMBAC Insd) .................................................... AAA Aaa 6.375 4/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College Cleveland Elec
Ser A Rfdg ...................................................... BB Ba2 8.000 10/01/23 1,962,140
-------------
15,195,140
-------------
Oklahoma 0.5%
2,810 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B
(Inverse Fltg) .................................................. AAA NR 7.997 8/01/18 3,034,800
-------------
Pennsylvania 1.7%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser A Rfdg ... BBB NR 6.750 11/15/14 2,613,420
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp Crozer-Chester
Mem Cent ........................................................ BBB+ A 6.000 12/15/20 1,587,840
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00) ..................................... BBB- NR 8.875 10/01/20 1,734,660
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd) .................................... AAA Aaa 5.660 6/01/12 2,588,940
</TABLE>
See Notes to Financial Statements
E-8
<PAGE> 108
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania (Continued)
$2,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Temple Univ Hosp Ser A ......................................... BBB+ Baa1 6.500% 11/15/08 $ 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease Ser B Rfdg ................ BB Ba 6.400 11/15/16 870,416
------------
11,268,496
------------
Rhode Island 1.4%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ..................... NR NR 8.000 9/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn Corp Spl Oblig Ser A
(Prerefunded @ 08/01/02) ...................................... AAA Aaa 6.950 8/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B .......... A NR 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A ......................................... NR Ba 6.800 7/15/98 2,507,501
600 West Warwick, RI Ser A ......................................... NR Ba 7.300 7/15/08 604,374
------------
9,127,037
------------
Tennessee 0.5%
1,500 Maury Cnty, TN Indl Dev Brd Pollutn Ctl Rev Multi Modal
Saturn Corp Proj Rfdg .......................................... BBB+ Baa1 6.500 9/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth Spl Fac & Proj Rev
Federal Express Corp Rfdg ...................................... BBB Baa2 7.875 9/01/09 1,592,235
------------
2,976,945
------------
Texas 3.6%
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow Freight
Sys Inc Proj .................................................. A- NR 8.000 12/01/16 2,605,475
3,995 Leander, TX Indpt Sch Dist Cap Apprec Rfdg .................... NR Aaa * 8/15/16 853,652
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C Presbyterian
Hlthcare Sys (Inverse Fltg) (MBIA Insd) ....................... AAA Aaa 10.655 6/22/21 3,364,375
13,000 Texas Muni Pwr Agy Rev (MBIA Insd) ............................ AAA Aaa * 9/01/13 3,785,340
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll
Ser C Rfdg (Inverse Fltg) ..................................... AAA NR 9.207 7/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd College Student Ln <F4> .. NR A 0/7.850 10/01/25 2,391,494
3,954 Texas St ..................................................... NR NR 6.350 12/01/13 3,888,447
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp
Union Carbide Chem & Plastics ................................ BBB Baa2 8.200 3/15/21 2,365,897
------------
24,045,305
------------
Utah 2.1%
3,215 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj ............ NR NR 9.500 12/15/18 3,271,070
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg) ... AA Aa 6.150 2/15/12 9,668,560
1,000 Utah St Hsg Fin Agy Single Family Mtg Ser F2 ................. AAA Aaa 7.000 7/01/27 1,001,560
------------
13,941,190
------------
Virginia 1.8%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp Rev (AMBAC Insd) ......... AAA Aaa 5.500 9/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Inverse Fltg)
(FGIC Insd) ................................................... AAA Aaa 6.600 8/15/23 3,403,330
</TABLE>
See Notes to Financial Statements
E-9
<PAGE> 109
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Virginia (Continued)
$ 2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ..................... AAA Aaa 6.800% 3/01/14 $ 2,102,423
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ..................... AAA Aaa 6.900 3/01/19 1,011,500
3,535 Norfolk, VA Wtr Rev ....................................... AAA Aaa 5.250 11/01/13 3,038,014
1,250 Southeastern Pub Svc Auth VA Rev Sr Regl Solid Waste Sys ... A- A 6.000 7/01/17 1,100,425
------------
11,520,352
------------
West Virginia 1.4%
2,500 Harrison Cnty, WV Cnty Comm Solid Waste Disp Rev
Monongahela Pwr Co ........................................... A A1 6.875 4/15/22 2,449,900
6,750 South Charleston, WV Indl Dev Rev Union Carbide
Chem & Plastics Ser A ........................................ BBB Baa2 8.000 8/01/20 7,020,810
------------
9,470,710
------------
Wisconsin 0.5%
3,200 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg
(Inverse Fltg) ............................................... A+ Aa 9.580 10/25/22 3,008,000
------------
Wyoming 0.3%
2,000 Sweetwater Cnty, WY Solid Waste Disp Rev FMC Corp Proj Ser B . BBB Baa3 6.900 9/01/24 1,842,220
------------
Total Long-Term Investments 98.9%
(Cost $667,323,342) <F1>......................................................................... 652,138,108
Other Assets in Excess of Liabilities 1.1% ..................................................... 7,216,006
--------------
Net Assets 100% ................................................................................ $ 659,354,114
==============
*Zero coupon bond
<FN>
<F1>At December 31, 1994, for federal income tax purposes cost is
$667,518,084; the aggregate gross unrealized appreciation is $30,921,003 and
the aggregate gross unrealized depreciation is $44,250,963, resulting in net
unrealized depreciation including futures transactions of $13,329,960.
<F2>Assets segregated as collateral for open futures transactions.
<F3>Non-income producing security.
<F4>Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
</FN>
</TABLE>
See Notes to Financial Statements
E-10
<PAGE> 110
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $667,323,342) <Note 1>................................... $ 652,138,108
Receivables:
Interest.................................................................................... 12,305,247
Fund Shares Sold............................................................................ 799,516
Investments Sold............................................................................ 535,000
Unamortized Organizational Expenses and Initial Registration Costs <Note 1>..................... 17,688
Other....................................................................................... 2,841
--------------
Total Assets................................................................................ 665,798,400
--------------
Liabilities:
Payables:
Fund Shares Repurchased..................................................................... 2,429,138
Income Distributions ....................................................................... 1,627,340
Custodian Bank.............................................................................. 879,971
Margin on Futures <Note 5>.................................................................. 352,445
Investment Advisory Fee <Note 2>............................................................ 273,528
Accrued Expenses............................................................................ 881,864
--------------
Total Liabilities........................................................................... 6,444,286
--------------
Net Assets.................................................................................. $ 659,354,114
==============
Net Assets Consist of:
Paid in Surplus <Note 3>.................................................................... $ 698,739,659
Accumulated Distributions in Excess of Net Investment Income <Note 1>....................... (228,298)
Net Unrealized Depreciation on Investments.................................................. (13,135,218)
Accumulated Net Realized Loss on Investments ............................................... (26,022,029)
--------------
Net Assets.................................................................................. $ 659,354,114
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $495,814,695 and
34,768,092 shares of beneficial interest issued and outstanding) <Note 3>................... $ 14.26
Maximum sales charge (4.65%* of offering price)............................................. .70
--------------
Maximum offering price to public ........................................................... $ 14.96
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $158,705,886 and
11,128,652 shares of beneficial interest issued and outstanding) <Note 3>................... $ 14.26
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,850,918 and
270,017 shares of beneficial interest issued and outstanding) <Note 3>...................... $ 14.26
==============
Class D Shares:
Net asset value and offering price per share (Based on net assets of $982,615 and
68,899 shares of beneficial interest issued and outstanding) <Note 3>....................... $ 14.26
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.
See Notes to Financial Statements
E-11
<PAGE> 111
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest............................................................................................. $ 49,936,822
Amortization of Discount (Premium) - Net............................................................. (354,986)
---------------
Total Income......................................................................................... 49,581,836
---------------
Expenses:
Investment Advisory Fee <Note 2>..................................................................... 3,475,616
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $1,626,311, $1,662,702,
$41,554 and $2,828, respectively) <Note 6>........................................................... 3,333,395
Shareholder Services ................................................................................ 829,610
Legal <Note 2>....................................................................................... 186,400
Amortization of Organizational Expenses and Initial Registration Costs <Note 1>...................... 30,470
Trustees Fees and Expenses <Note 2>.................................................................. 26,240
Other................................................................................................ 411,534
---------------
Total Expenses....................................................................................... 8,293,265
---------------
Net Investment Income................................................................................ $ 41,288,571
===============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.................................................................................. $ 692,840,108
Cost of Securities Sold (Including reorganization and restructuring costs of $144,803)............... (708,359,483)
---------------
Net Realized Loss on Investments (Including realized loss on closed and
expired option transactions and futures transactions of $1,411,955 and $788,622, respectively)....... (15,519,375)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.............................................................................. 63,265,059
End of the Period (Including unrealized appreciation on open futures transactions of $2,050,016)..... (13,135,218)
---------------
Net Unrealized Depreciation on Investments During the Period......................................... (76,400,277)
---------------
Net Realized and Unrealized Loss on Investments...................................................... $ (91,919,652)
===============
Net Decrease in Net Assets from Operations........................................................... $ (50,631,081)
===============
</TABLE>
See Notes to Financial Statements
E-12
<PAGE> 112
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 41,288,571 $ 39,506,461
Net Realized Loss on Investments............................................ (15,519,375) (10,384,633)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (76,400,277) 45,121,848
---------------- ----------------
Change in Net Assets from Operations ....................................... (50,631,081) 74,243,676
---------------- ----------------
Distributions from Net Investment Income*................................... (41,020,921) (39,506,461)
Distributions in Excess of Net Investment Income* <Note 1>.................. -0- (495,948)
---------------- ----------------
Distributions from and in Excess of Net Investment Income*.................. (41,020,921) (40,002,409)
Distributions in Excess of Net Realized Gain on Investments* <Note 1>....... -0- (38,069)
---------------- ----------------
Total Distributions......................................................... (41,020,921) (40,040,478)
---------------- ----------------
Net Change in Net Assets from Investment Activities......................... (91,652,002) 34,203,198
---------------- ----------------
From Capital Transactions <Note 3>
Proceeds from Shares Sold................................................... 76,732,460 265,150,384
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 21,110,678 19,988,555
Cost of Shares Repurchased.................................................. (116,770,207) (61,493,977)
---------------- ----------------
Net Change in Net Assets from Capital Transactions ......................... (18,927,069) 223,644,962
---------------- ----------------
Total Increase/Decrease in Net Assets....................................... (110,579,071) 257,848,160
Net Assets:
Beginning of the Period..................................................... 769,933,185 512,085,025
---------------- ----------------
End of the Period (Including undistributed net investment income
of $(228,298) and $(495,948), respectively) ................................ $ 659,354,114 $ 769,933,185
- ---------------------------------------------------------------------------- ================ ================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares.............................................. $ (32,205,506) $ (33,630,614)
Class B Shares.............................................. (8,547,628) (6,329,274)
Class C Shares.............................................. (212,571) (42,521)
Class D Shares.............................................. (55,216) -0-
--------------- ---------------
$ (41,020,921) $ (40,002,409)
=============== ===============
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares.............................................. $ -0- $ (13,619)
Class B Shares.............................................. -0- (24,450)
Class C Shares.............................................. -0- -0-
Class D Shares.............................................. -0- -0-
--------------- ---------------
$ -0- $ (38,069)
=============== ===============
</TABLE>
See Notes to Financial Statements
E-13
<PAGE> 113
VAN KAMPEN MERRITT MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------
AUGUST 1, 1990
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED DECEMBER 31 OPERATIONS) TO
------------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $16.164 $15.310 $15.071 $14.250 $ 14.263
------- ------- ------- ------- --------
Net investment income................. .886 .964 1.041 1.066 .406
Net realized and unrealized gain/loss
on investments..................... (1.907) .862 .374 .853 (.049)
------- ------- ------- ------- --------
Total from investment operations........ (1.021) 1.826 1.415 1.919 .357
------- ------- ------- ------- --------
LESS:
Distributions from and in excess of
net investment income (note 1)..... .882 .972 1.044 1.098 .370
Distributions from and in excess of
net realized gain on investments
(note 1)........................... .000 .000 .132 .000 .000
------- ------- ------- ------- --------
Total distributions..................... .882 .972 1.176 1.098 .370
------- ------- ------- ------- --------
Net asset value, end of period.......... $14.261 $16.164 $15.310 $15.071 $ 14.250
======= ======= ======= ======= ========
TOTAL RETURN* (non-annualized).......... (6.37%) 12.20% 9.69% 13.98% 2.57%
Net assets at end of period (in
millions)............................. $ 495.8 $ 597.6 $ 463.6 $ 293.7 $ 146.6
Ratio of expenses to average net assets*
(annualized).......................... .99% .87% .86% .59% .89%
Ratio of net investment income to
average net assets* (annualized)...... 5.93% 6.08% 6.76% 7.29% 7.11%
Portfolio turnover...................... 74.96% 81.78% 91.57% 105.99% 108.79%
</TABLE>
- ---------------
* 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>
Ratio of expenses to average net assets
(annualized).......................... N/A .98% 1.00% 1.07% 1.19%
Ratio of net investment income to
average net assets (annualized)....... N/A 5.97% 6.62% 6.81% 6.81%
</TABLE>
N/A = Not Applicable
See Notes to Financial Statements
E-14
<PAGE> 114
VAN KAMPEN MERRITT MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
------------------------------------------------
AUGUST 24, 1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period............... $ 16.139 $ 15.308 $ 15.481
-------- -------- --------
Net investment income............................ .780 .852 .320
Net realized and unrealized gain/loss on
investments................................... (1.890) .845 (.033)
-------- -------- --------
Total from investment operations................... (1.110) 1.697 .287
-------- -------- --------
LESS:
Distributions from and in excess of net
investment income (note 1).................... .768 .866 .328
Distributions from and in excess of net realized
gain on investments (note 1).................. .000 .000 .132
-------- -------- --------
Total distributions................................ .768 .866 .460
-------- -------- --------
Net asset value, end of period..................... $ 14.261 $ 16.139 $ 15.308
======== ======== ========
TOTAL RETURN* (non-annualized)..................... (6.96%) 11.33% 1.90%
Net assets at end of period (in millions).......... $ 158.7 $ 168.2 $ 48.4
Ratio of expenses to average net assets*
(annualized)..................................... 1.70% 1.65% 1.66%
Ratio of net investment income to average net
assets* (annualized)............................. 5.22% 5.19% 5.23%
Portfolio turnover................................. 74.96% 81.78% 91.57%
</TABLE>
- ---------------
* 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>
Ratio of expenses to average net assets
(annualized)..................................... N/A 1.73% 2.42%
Ratio of net investment income to average net
assets (annualized).............................. N/A 5.11% 4.48%
</TABLE>
N/A = Not Applicable
See Notes to Financial Statements
E-15
<PAGE> 115
VAN KAMPEN MERRITT MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period........................... $ 16.141 $ 15.990
-------- --------
Net investment income........................................ .783 .300
Net realized and unrealized gain/loss on investments......... (1.894) .171
-------- --------
Total from investment operations............................... (1.111) .471
Less distributions from and in excess of net investment
income (note 1).............................................. .768 .320
-------- --------
Net asset value, end of period................................. $ 14.262 $ 16.141
======== ========
TOTAL RETURN (non-annualized).................................. (6.97%) 2.96%
Net assets at end of period (in millions)...................... $ 3.9 $ 4.1
Ratio of expenses to average net assets (annualized)........... 1.74% 1.85%
Ratio of net investment income to average net assets
(annualized)................................................. 5.19% 3.95%
Portfolio Turnover............................................. 74.96% 81.78%
</TABLE>
- ---------------
*During the time periods noted, no expenses were assumed by the Adviser.
See Notes to Financial Statements
E-16
<PAGE> 116
VAN KAMPEN MERRITT MUNICIPAL INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the period indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS D SHARES
----------------
MARCH 14, 1994
(COMMENCEMENT OF
DISTRIBUTION) TO
DECEMBER 31,
1994
- ----------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period....................................... $ 15.290
--------
Net investment income.................................................... .701
Net realized and unrealized loss on investments.......................... (1.031)
--------
Total from investment operations........................................... (.330)
Less distributions from and in excess of net investment income (note 1).... .698
--------
Net asset value, end of period............................................. $ 14.262
========
TOTAL RETURN (non-annualized).............................................. (2.19%)
Net assets at end of period (in millions).................................. $ 1.0
Ratio of expenses to average net assets* (annualized)...................... 1.05%
Ratio of net investment income to average net assets (annualized).......... 5.88%
Portfolio Turnover......................................................... 74.96%
</TABLE>
- ---------------
*During the time period noted, no expenses were assumed by the Adviser.
See Notes to Financial Statements
E-17
<PAGE> 117
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Municipal Income Fund (the "Fund") was organized as a
sub-trust of the Van Kampen Merritt Tax Free Fund, a Massachusetts business
trust, and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund commenced
investment operations on August 1, 1990. On August 24, 1992, the Fund commenced
the distribution of its Class B shares. The distribution of the Fund's Class C
shares, which were initially introduced as Class D shares and subsequently
renamed Class C shares on March 7, 1994, commenced on August 13, 1993. The
distribution of the Fund's fourth class of shares, Class D shares, commenced on
March 14, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain in a segregated account with its custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.
C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.
D. Organizational Expenses and Initial Registration Costs-The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $152,425. These costs are being amortized
on a straight line basis over the 60 month period ending July 31, 1995. Van
Kampen American Capital Investment Advisory Corp. (the "Adviser") has agreed
that in the event any of the initial shares of the Fund originally purchased
by VKAC are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $18,151,198. Of this amount, $10,452,715 and
$7,698,483 will expire on December 31, 2001 and 2002, respectively. Net realized
gains or losses may differ for financial and tax reporting purposes primarily as
a result of the deferral of post October 31 losses and the capitalization of
reorganization and restructuring costs for tax purposes.
F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes. Due to inherent differences in the recognition of interest income
under generally accepted accounting principles and federal income tax purposes,
for those securities which the Fund has placed on non-accrual status, the amount
of distributable net investment income may differ between book and federal
income tax purposes for a particular period. These differences are temporary in
E-18
<PAGE> 118
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
nature, but may result in book basis distribution in excess of net investment
income for certain periods.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------
<S> <C>
First $500 million... .50 of 1%
Over $500 million.... .45 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $375,000 representing VKAC's cost of providing accounting, legal
and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 387, 105, 100 and 100 shares of Classes A, B,
C and D, respectively.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1994, paid in surplus aggregated $518,901,563, $174,384,111,
$4,365,588 and $1,088,397 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 2,891,335 $ 43,601,705
Class B........................ 1,909,204 28,989,319
Class C........................ 141,638 2,139,693
Class D........................ 133,104 2,001,743
----------- ----------------
Total Sales.................... 5,075,281 $ 76,732,460
=========== ================
Dividend Reinvestment:
Class A........................ 1,085,808 $ 16,133,995
Class B........................ 325,032 4,818,852
Class C........................ 9,020 133,759
Class D........................ 1,671 24,072
----------- ----------------
Total Dividend Reinvestment ... 1,421,531 $ 21,110,678
=========== ================
Repurchases:
Class A........................ (6,182,355) $ (91,457,676)
Class B........................ (1,527,736) (22,372,124)
Class C........................ (134,564) (2,002,989)
Class D........................ (65,876) (937,418)
----------- ----------------
Total Repurchases.............. (7,910,531) $ (116,770,207)
=========== ================
</TABLE>
E-19
<PAGE> 119
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
At December 31, 1993, paid in surplus aggregated $550,623,539, $162,948,064 and
$4,095,125 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 8,915,080 $ 140,550,519
Class B ...................... 7,505,483 118,273,049
Class C....................... 394,838 6,326,816
----------- ---------------
Total Sales................... 16,815,401 $ 265,150,384
=========== ===============
Dividend Reinvestment:
Class A ...................... 1,031,763 $ 16,387,904
Class B ...................... 224,461 3,569,933
Class C....................... 1,914 30,718
----------- ---------------
Total Dividend Reinvestment... 1,258,138 $ 19,988,555
=========== ===============
Repurchases:
Class A ...................... (3,256,771) $ (51,726,961)
Class B ...................... (471,941) (7,504,607)
Class C....................... (142,829) (2,262,409)
----------- ---------------
Total Repurchases............. (3,871,541) $ (61,493,977)
=========== ===============
</TABLE>
Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>
For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$209,000 and CDSC on the redeemed shares of Classes B, C and D of approximately
$516,000. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and sales of investment securities, excluding short-term
notes and reorganization and restructuring costs, for the year ended December
31, 1994, were $541,728,813 and $708,214,680, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where
the recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
E-20
<PAGE> 120
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
- --------------------------------------------------------------------------------
Transactions in options for the year ended December 31, 1994, were
as follows:
<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993... 850 $ 429,134
Options Written and
Purchased (Net).................... 13,078 (2,715,877)
Options Terminated in Closing
Transactions (Net)................. (6,870) (166,364)
Options Expired ................... (6,458) 2,554,550
Options Exercised.................. (600) (101,443)
------ ----------
Outstanding at December 31, 1994... -0- $ -0-
====== ==========
</TABLE>
B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.
Transactions in futures contracts for the year ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------
<S> <C>
Outstanding at December 31, 1993... 2,551
Futures Opened..................... 86,779
Futures Closed .................... (70,246)
--------
Outstanding at December 31, 1994... 19,084
========
</TABLE>
The futures contracts outstanding at December 31, 1994, and the descriptions and
unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
- ----------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
Mar 1995 - Sells to Open 2,483 $ 903,312
Mar 1995 - Buys to Open ........... 4,216 4,185,872
June 1995 - Sells to Open .......... 1,061 (837,479)
Two-year U.S. Treasury Note Futures
Mar 1995 - Buys to Open ........... 750 (72,470)
Five-year U.S. Treasury Note Futures
Mar 1995 - Sells to Open ........... 1,000 1,443,831
Municipal Bond Futures
Mar 1995 - Buys to Open ............ 726 (22)
Eurodollar Note Futures
Mar 1995 - Sells to Open ........... 4,424 8,328,486
June 1995 - Buys to Open............ 4,424 (11,901,514)
--------- --------------
19,084 $ 2,050,016
========= ==============
</TABLE>
C. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed coupon
component of the underlying bond is adjusted by the difference between the
securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.
E-21
<PAGE> 121
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
- --------------------------------------------------------------------------------
December 31, 1994
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A and Class D shares
and 1.00% each for Class B and Class C shares are accrued daily. Included in
these fees for the year ended December 31, 1994, are payments to VKAC of
approximately $1,540,000.
E-22
<PAGE> 122
Van Kampen Merritt Municipal Income Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement
of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial state-
ments and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Municipal Income Fund as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 14, 1995
E-23
<PAGE> 123
DEAR VAN KAMPEN AMERICAN CAPITAL INSURED MUNICIPAL PORTFOLIO SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Insured Municipal Portfolio
(the "AC Fund"), a portfolio of the Van Kampen American Capital Tax-Exempt Trust
("Tax-Exempt Trust"). The Reorganization calls for the AC Fund shareholders to
become shareholders of the Van Kampen American Capital Insured Tax Free Income
Fund (the "VK Fund"), a fund which pursues a substantially similar investment
objective.
The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed Reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the Reorganization, please refer to
the combined Proxy Statement/Prospectus.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the AC Fund approve the Reorganization, the assets
and liabilities of the AC Fund will be combined with those of the VK Fund and
you will become a shareholder of the VK Fund. You will receive shares of the VK
Fund approximately equal in value at the time of issuance to the shares of the
AC Fund that you hold immediately prior to the Reorganization. Class A
shareholders of the AC Fund would receive Class A shares of the VK Fund; Class B
shareholders of the AC Fund would receive Class B shares of the VK Fund; and
Class C shareholders of the AC Fund would receive Class C shares of the VK Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp.
("VK Adviser") the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the AC Fund and the VK Fund
separately. The Reorganization would result in combining the assets and
liabilities of the AC Fund and the VK Fund and consolidating their operations.
The Reorganization is intended to provide various benefits to shareholders
of the AC Fund who become shareholders of the VK Fund (as well as to existing
and future investors in the VK Fund). For example, higher net asset levels would
enable the VK Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
reducing per share expense levels. Higher net asset levels also may benefit
portfolio management by permitting larger individual portfolio investments that
may result in reduced transaction costs or more favorable pricing and by
providing the opportunity for greater portfolio diversity. These benefits, in
turn, should have a favorable effect on the relative performance of the VK Fund.
The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including approval by the AC Fund's shareholders), which
are summarized below in "The Proposed Reorganization -- Terms of the Agreement"
section of the combined Proxy Statement/Prospectus. These
<PAGE> 124
conditions are stated in the Agreement, which is attached as Exhibit A to the
combined Proxy Statement/Prospectus.
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the AC Fund would be exchanged for
shares of the corresponding class of the VK Fund without any sales load,
commission or other transactional fee being imposed. As more fully discussed in
the combined Proxy Statement/Prospectus, the holding period for shareholders
acquiring Class B or Class C shares in the Reorganization subject to a
contingent deferred sales charge will be measured from the time (i) the holder
purchased Class B or C shares from the AC Fund or (ii) purchased Class B or C
shares of any other Van Kampen American Capital open-end fund and subsequently
exchanged into Class B or C shares of the AC Fund. The VK Fund will bear the
costs associated with the Reorganization, such as printing and mailing costs and
other expenses associated with the Special Meeting.
HOW WILL THE FEES PAID BY THE VK FUND COMPARE TO THOSE PAYABLE BY THE AC FUND?
It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the VK Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses currently being paid by
the AC Fund.
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND? WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION
IS APPROVED?
If the Reorganization is approved, your interest in Class A, B or C shares,
respectively, of the AC Fund will be converted automatically into the same class
of shares of the VK Fund and we will send you written confirmation that this
change has taken place. You will receive the same class of shares of the VK Fund
approximately equal in value to your Class A, B or C shares of the AC Fund. No
certificates for VK Fund shares will be issued in connection with the
Reorganization, although such certificates will be available upon request. If
you currently hold certificates representing your shares of the AC Fund, it is
not necessary to surrender such certificates.
WHO WILL ADVISE THE VK FUND AND PROVIDE OTHER SERVICES?
VK Adviser provides advisory services to the VK Fund under an arrangement
that is substantially similar to that currently in effect between the AC Fund
and AC Adviser. The contractual advisory fees payable by the VK Fund are no
higher than the contractual advisory fees applicable to the AC Fund. Van Kampen
American Capital Distributors, Inc. serves as distributor of the shares of both
the VK Fund and the AC Fund. In addition, State Street Bank & Trust Company, 225
Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is the
custodian of both the VK Fund and the AC Fund. ACCESS Investor Services, Inc.,
P.O. Box 418256, Kansas City, Missouri 64141-9256, serves as the transfer agent
for both the VK Fund and the AC Fund.
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a stockholder of
the AC Fund will recognize no gain or loss upon the receipt of solely
<PAGE> 125
the Shares of the VK Fund in connection with the Reorganization. Additionally,
the AC Fund would not recognize any gain or loss as a result of the transfer of
all of its assets and liabilities solely in exchange for the Shares of the VK
Fund or as a result of its liquidation. The VK Fund expects that it will not
recognize any gain or loss as a result of the Reorganization, that it will take
a carryover basis in the assets acquired from the AC Fund and that its holding
period of such assets will include the period during which the assets were held
by AC Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences"
in the combined Proxy Statement/Prospectus.
WHAT IF I REDEEM MY AC FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?
If you choose to redeem your shares of AC Fund before the Reorganization
takes place, the redemption will be treated as a normal redemption of shares and
will be a taxable transaction, unless your account is not subject to taxation,
such as an individual retirement account or other tax-qualified retirement plan.
We hope these answers help to clarify the Reorganization proposal for you.
If you still have questions, do not hesitate to call us at 1-800-982-3482.
Please give this matter your prompt attention. We need to receive your proxy
before the shareholder meeting scheduled for September 8, 1995. If shareholders
approve the Reorganization, it is expected to take effect on [MONTH, 1995].
Thank you for your investment in Van Kampen American Capital Insured
Municipal Portfolio.
Very truly yours,
Van Kampen American Capital Insured
Municipal Portfolio
Don G. Powell
President and Trustee
<PAGE> 126
VAN KAMPEN AMERICAN CAPITAL
TAX-EXEMPT TRUST
INSURED MUNICIPAL PORTFOLIO
2800 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(800) 421-5666
NOTICE OF SPECIAL MEETING
SEPTEMBER 8, 1995
A Special Meeting of Shareholders of Van Kampen American Capital Insured
Municipal Portfolio (the "AC Fund") will be held at the [Transco Tower
Auditorium, Level 2, 2800 Post Oak Boulevard, Houston, Texas 77056,], on
September 8, 1995 at [TIME] (the "Special Meeting") for the following purposes:
(1) To approve a plan of reorganization pursuant to which the
AC Fund would transfer all of its assets and liabilities to the Van
Kampen American Capital Insured Tax Free Income Fund (the "VK Fund")
in exchange for Class A, B and C shares of beneficial interest of
the VK Fund, the AC Fund would distribute such Class A, B and C
Shares of the VK Fund to the holders of Class A, B and C Shares,
respectively, of the AC Fund and the AC Fund would be dissolved.
(2) To transact such other business as may properly come before
the Special Meeting.
Shareholders of record as of the close of business on [MONTH, DAY] 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Nori L. Gabert
Secretary
JULY , 1995
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 127
VAN KAMPEN AMERICAN CAPITAL INSURED MUNICIPAL PORTFOLIO
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL INSURED MUNICIPAL PORTFOLIO
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
This Proxy Statement/Prospectus is being furnished to shareholders of Van
Kampen American Capital Tax Exempt Trust Insured Municipal Portfolio (the "AC
Fund"), and relates to the Special Meeting of Shareholders of the AC Fund called
for the purpose of approving the proposed reorganization of the AC Fund (the
"Reorganization") which would result in shareholders of the AC Fund in effect
exchanging their AC Fund shares for shares of the Van Kampen American Capital
Insured Tax Free Income Fund (the "VK Fund"), a series of the Van Kampen
American Capital Tax Free Fund, a Delaware business trust (the "VKAC Tax Free
Fund"). The Reorganization would be accomplished as follows: (1) the VK Fund
would acquire all the then existing assets and liabilities of the AC Fund in
exchange for Class A, B and C shares of beneficial interest of the VK Fund (the
"Shares"); (2) the AC Fund would distribute the Shares to the AC Fund
shareholders holding the same respective class of shares; and (3) the AC Fund
would be terminated and all shares of the AC Fund would be cancelled.
The VK Fund is one of eight series of the VKAC Tax Free Fund, an open-end,
diversified management investment company, which is authorized to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, for
each series authorized by its Board of Trustees. Each series represents
interests in a separate portfolio of securities and other assets, with its own
investment objectives and policies. The investment objective of the VK Fund is
to provide investors with a high level of current income exempt from federal
income tax, which is substantially similar to that of the AC Fund. (See "Summary
- -- Investment Objective and Policies" below.) There can be no assurance that the
VK Fund will achieve its investment objective. The address and principal
executive office of the VKAC Tax Free Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, telephone no. (708) 684-6000 or (800) 225-2222. The
address and principal executive office of the AC Fund is 2800 Post Oak
Boulevard, Houston, Texas 77056, telephone no. (800) 421-5666. The enclosed
proxy and this Proxy Statement/Prospectus are first being sent to AC Fund
shareholders on or about [MONTH, DAY,] 1995.
---------------------
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
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
This Proxy Statement/Prospectus contains information shareholders of the AC
Fund should know before voting on the Reorganization and constitutes an offering
of Class A, B and C Shares of the VK Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information
[Continued on next page]
The date of this Proxy Statement/Prospectus is July [ ], 1995.
1
<PAGE> 128
[Continued from previous page]
dated [MONTH, DAY,] 1995, relating to this Proxy Statement/Prospectus (the
"Reorganization SAI") have been filed with the Securities and Exchange
Commission (the "SEC") and are incorporated herein by reference. A Prospectus
and Statement of Additional Information containing additional information about
the VK Fund, each dated [MONTH, DAY,] 1995, have been filed with the SEC and are
incorporated herein by reference. A copy of the VK Fund Prospectus accompanies
this Proxy Statement/Prospectus. A Prospectus and Statement of Additional
Information containing additional information about the VK Fund, each dated
[MONTH, DAY], 1995, have been filed with the SEC and are incorporated herein by
reference. Copies of any of the foregoing may be obtained without charge by
calling or writing to the AC Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI."
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
Each of the VK Fund and the VKAC Tax Free Fund is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and the Investment Company Act of 1940, as amended (the "Act"), and in
accordance therewith files reports and other information with the SEC. Such
reports, other information and proxy statements filed by the VK Fund and the
VKAC Tax Free Fund can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates.
The date of this Proxy Statement/Prospectus is [July] , 1995.
2
<PAGE> 129
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION.................................. 4
A. SUMMARY............................................................................ 4
The Reorganization............................................................... 4
Comparisons of the VK Fund and AC Fund........................................... 5
Investment Objectives and Policies............................................ 6
Advisory and Other Fees....................................................... 7
Distribution, Purchase, Valuation, Redemption and Exchange of Shares.......... 7
Federal Income Tax Consequences.................................................. 11
Reasons for the Proposed Reorganization.......................................... 11
B. RISK FACTORS....................................................................... 13
Nature of Investment............................................................. 13
Changes in Certain Investment Practices.......................................... 13
C. INFORMATION ABOUT THE FUNDS........................................................ 13
D. THE PROPOSED REORGANIZATION........................................................ 14
Terms of the Agreement........................................................... 14
Description of Securities to Be Issued........................................... 15
Shares of Beneficial Interest................................................. 15
Voting Rights of Shareholders................................................. 15
Continuation of Shareholder Accounts and Plans; Share Certificates............... 16
Federal Income Tax Consequences.................................................. 16
Capitalization................................................................... 18
Comparative Performance Information.............................................. 18
Ratification of Investment Objective, Policies and Restrictions of the VK Fund... 19
Legal Matters.................................................................... 19
Expenses......................................................................... 19
E. RECOMMENDATION OF THE AC BOARD..................................................... 19
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING.................................. 20
OTHER INFORMATION....................................................................... 20
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND....................................... 20
B. SHAREHOLDER PROPOSALS.............................................................. 20
VOTING INFORMATION AND REQUIREMENTS..................................................... 20
</TABLE>
3
<PAGE> 130
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by references to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VK Fund
attached hereto as Exhibit A (the "Agreement"), the prospectus of the AC Fund
dated [MONTH, DAY], 1995 (the "AC Fund Prospectus") incorporated herein by
reference, and the prospectus of the VK Fund dated [MONTH, DAY], 1995 (the "VK
Fund Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of
Class A, B and C Shares of the VK Fund only.
THE REORGANIZATION
On May 11, 1995, the Board of Trustees of the AC Fund (the "AC Board")
approved the Agreement. The Agreement provides that the AC Fund will transfer
all of its assets and liabilities to the VK Fund in exchange for Class A, B and
C shares of the VK Fund. At the Closing (as defined herein), the VK Fund will
issue shares of the VK Fund to the AC Fund, which VK Fund Shares will have an
aggregate net asset value approximately equal in amount to the value of the AC
Fund net assets as of the Closing. The Agreement provides that the AC Fund will
dissolve pursuant to a plan of liquidation and dissolution to be adopted by the
AC Board following the Closing, and as part of such dissolution, will distribute
to each shareholder of the AC Fund Shares of the respective class of the VK Fund
approximately equal in value to their existing shares in the AC Fund. All
members of the AC Board were elected as trustees of the VKAC Tax Free Fund on
July 21, 1995.
The AC Board has unanimously determined that the Reorganization is in the
best interests of the shareholders of each class of shares the AC Fund and that
the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the VKAC Tax Free Fund (the
"VK Board") has unanimously determined that the Reorganization is in the best
interests of the VK Fund and that the interests of existing shareholders of each
class of shares of the VK Fund will not be diluted as a result of the
Reorganization. Management of the respective funds believes that the proposed
Reorganization of the AC Fund into the VK Fund should allow the VK Fund to
achieve future economies of scale and to eliminate certain costs of operating
the AC Fund and the VK Fund separately.
The VK Fund has agreed to pay all of the costs of soliciting approval of
the Reorganization and related costs of the Reorganization, including expenses
incurred by the AC Fund. Accordingly, shareholders of the VK Fund after the
Reorganization will bear a pro rata portion of such expenses.
The AC Board is asking shareholders of the AC Fund to approve the
Reorganization at a Special Meeting called to be held on September 8, 1995. If
shareholders of the AC Fund approve the Reorganization, it is expected that the
Closing will be on [ , 1995], but it may be at a different time as
described herein.
THE AC BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF
THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF A MAJORITY OF THE OUTSTANDING
SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS."
4
<PAGE> 131
COMPARISONS OF THE VK FUND AND THE AC FUND
The principal changes which would result from the Reorganization are listed
below:
(1) The holders of Class A, B and C shares the AC Fund would become
shareholders of the same class of Shares, respectively, of the VK Fund. The
AC Fund and the VK Fund have substantially similar investment objectives
and follow similar investment strategies.
(2) The VK Fund is managed by Van Kampen American Capital Investment
Advisory Corp. ("VK Adviser"), an affiliate of the AC Fund's adviser, Van
Kampen American Capital Asset Management, Inc. ("AC Adviser"). The annual
advisory fee for the VK Fund is 0.525% of its daily net assets up to $500
million, 0.50% on the next $500 million, 0.475% on the next $500 million
and 0.45% on assets over $1,500 million. As of March 31, 1995, the VK
Fund's net assets were approximately $1,222.3 million.
The annual advisory fee for the AC Fund is 0.60% of its daily net
assets up to $300 million, 0.55% on the next $300 million and 0.50%
thereafter (assets are combined with the American Capital High Yield
Municipal Portfolio, a series of the VKAC Tax Free Income Fund, for
purposes of calculating management fees.) As of March 31, 1995, the AC
Fund's net assets were approximately $105.8 million.
(3) Both the AC Fund and the VK Fund offer three classes of shares.
Class A Shares of the VK Fund and the AC Fund are subject to an initial
sales charge of up to 4.75%. Purchases of Class A Shares of the VK Fund or
the AC Fund in amounts of $1,000,000 or more are not subject to an initial
sales charge but a contingent deferred sales charge of 1.00% may be imposed
on certain redemptions made within one year after purchase. However, the
initial sales charge will be waived for Class A Shares acquired in the
Reorganization. Any subsequent purchases of Class A Shares of the VK Fund
will be subject to a sales charge of up to 4.75% excluding Class A Shares
purchased through the dividend reinvestment plan. Class B Shares of the VK
Fund and Class B shares of the AC Fund do not incur a sales charge when
they are purchased, but generally are subject to a sales charge of 4.00% if
redeemed within the first year of purchase, which charge is reduced to zero
over a six year period in the case of the VK Fund and over a five year
period in the case of the AC Fund. However, Class B Shares of the VK Fund
acquired in the Reorganization will remain subject to the contingent
deferred sales charge applicable to Class B shares of the AC Fund. Class C
Shares of the VK Fund and the AC Fund do not incur a sales charge when they
are purchased, but are subject to a contingent deferred sales charge of
1.00% if redeemed within the first year after purchase.
(4) Both the AC Fund and the VK Fund have adopted distribution plans
(the "Distribution Plans") pursuant to Rule 12b-1 under the Act, and have
adopted service plans (the "Service Plans"). Both the VK Fund and the AC
Fund can charge up to 0.75% of their respective average daily net assets
attributable to Class B and C shares for reimbursement of certain
distribution-related expenses. In addition, both the VK Fund and the AC
Fund can charge up to 0.25% of the their respective average daily net
assets attributable to Class A, B and C shares for the provision of ongoing
services to shareholders. Class B Shares of the VK Fund automatically
convert to Class A Shares after seven years, while Class B shares of the AC
Fund automatically convert to Class A shares after six years. Unlike Class
C Shares of the VK Fund, Class C Shares of the AC Fund automatically
convert to Class A shares after ten years. However, Class B and C Shares of
the VK Fund acquired in the Reorganization will automatically convert to
Class A Shares in accordance with the same conversion schedule applicable
to Class B and C shares of the AC Fund, respectively.
Certain other comparisons between the AC Fund and the VK Fund are discussed
below.
5
<PAGE> 132
INVESTMENT OBJECTIVES AND POLICIES
The VK Fund and the AC Fund have substantially similar investment
objectives, policies and restrictions. The investment objective of the VK Fund
is to provide investors with a high level of current income exempt from federal
income tax. The investment objective of the AC Fund is to provide investors as
high a level of current interest income exempt from federal income tax as is
consistent with the preservation of capital.
The VK Fund and the AC Fund both attempt to achieve their investment
objectives by generally investing at least 80% of their assets in diversified
portfolios of insured tax-exempt municipal securities rated investment grade at
the time of investment.
There are certain differences in the investment policies of the VK Fund and
the AC Fund. For instance, the VK Fund is prohibited from investing in private
activity bonds, while the AC Fund has invested approximately 16% of its assets
in such securities.
However, there are certain differences between the Funds. The interest on
such private activity bonds is an item of tax preference subject to the
alternative minimum tax on individuals and corporations. In addition, the VK
Fund requires that 100% of its assets be invested in securities which are
insured, while the AC Fund has approximately 3% of its assets invested in
uninsured securities. As the table below indicates, however, the holdings of the
VK Fund and the AC Fund have substantially similar credit quality.
A comparison of the credit quality of the respective portfolios of the VK
Fund and the AC Fund, as of March 31, 1995, is set forth in the table below.
CREDIT QUALITY
(AS OF MARCH 31, 1995)
<TABLE>
<CAPTION>
VK FUND AC FUND
--------------------------- ---------------------------
CREDIT RATING MOODY'S STANDARD & POOR'S MOODY'S STANDARD & POOR'S
- ---------------------------------------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Aaa/AAA....................................... 97.3% 99.3% 94.7% 95.7%
Aa/AA......................................... 0.4 0.4 2.1 3.1
A/A........................................... 0.0 0.2 0.0 0.0
Baa/BBB....................................... 0.1 0.0 0.0 0.0
B/B........................................... 0.0 0.1 0.0 0.0
Unrated....................................... 2.2 0.0 3.2 1.2
----- ----- ----- -----
TOTAL............................... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
The VK Fund is managed by VK Adviser while the AC Fund is managed by AC
Adviser. VK Adviser and AC Adviser are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which has been developing investment strategies
and products for individuals, businesses and institutions since 1974. VK Adviser
and AC Adviser are the primary investment advisers to the Van Kampen American
Capital funds. As of March 31, 1995, VK Adviser, AC Adviser and their affiliates
managed or supervised approximately $51.7 billion of assets, including assets of
65 open-end investment companies and 38 closed-end investment companies. The
business address of VK Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois
60181. VK Adviser and its investment advisory agreement with the VK Fund are
more fully described in the VK Fund Prospectus and Statement of Additional
Information.
6
<PAGE> 133
ADVISORY AND OTHER FEES
The AC Fund pays AC Adviser a monthly fee based on its average daily net
asset value at the annual rate of 0.60% for the first $300 million, 0.55% on the
next 300 million and 0.50% thereafter. Assets of the AC Fund are combined with
the Van Kampen American Capital High Yield Portfolio for the purposes of
calculating management fees. In addition, the AC Fund bears most expenses
associated with its operations and the issuance and repurchase or redemption of
its securities, except for the compensation of trustees affiliated with VKAC,
and officers of the AC Fund who are interested persons of VKAC or its
subsidiaries. Total operating expenses for the AC Fund for the period ended
November 30, 1994 were 1.15%, 1.91% and 1.89% with respect to Class A, B and C
shares, respectively.
The VK Fund pays VK Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.525% of the first $500 million, 0.50% on
the next $500 million, 0.475% on the next $500 million and 0.45% thereafter. The
advisory fee for the fiscal year ended December 31, 1994 was .51% of the VK
Fund's average daily net asset value. Further, the VK Fund also bears most
expenses associated with its operations and the issuance and repurchase or
redemption of its securities, except for the compensation of the trustees
affiliated with VKAC and officers of the VK Fund who are interested persons of
VKAC or its subsidiaries. The total operating expenses of the VK Fund for the
period ended December 31, 1994 were 0.97%, 1.80% and 1.79% of the average daily
net assets attributable to Class A, B and C shares, respectively, of the VK
Fund. For a complete description of the VK Fund's advisory services, see the
respective sections in the VK Fund's Prospectus and Statement of Additional
Information entitled "Investment Advisory Services" and "Investment Advisory and
Other Services -- Investment Advisory Agreement." For a complete description of
the AC Fund's advisory services, see the respective sections in the AC Fund's
Prospectus and Statement of Additional Information entitled "The Fund and its
Management" and "Investment Advisory Agreement."
In addition, the VK Fund also has adopted the Distribution Plan with
respect to each class of its shares pursuant to Rule 12b-1 under the Act and has
adopted the Service Plan with respect to each class of its shares. The
Distribution Plan and the Service Plan provides that the VK Fund can charge up
to 0.25%, 1.00% and 1.00% of the VK Fund's average daily net assets attributable
to the Class A, B and C shares, respectively, for reimbursement of certain
distribution-related expenses and for the provision of ongoing services to
shareholders. The Distribution Plan and the Service Plan are being implemented
through an agreement with Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"), the distributor of each class of the VK Fund's shares,
sub-agreements between VKAC Distributors and members of the National Association
of Securities Dealers, Inc. (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 VK Fund and banks who are acting as brokers for
their customers that may provide their customers or clients certain services or
assistance. For a complete description of these arrangements with respect to the
VK Fund, see the section in the VK Fund's Prospectus entitled "The Distribution
and Service Plans." For a complete description of these arrangements with
respect to the AC Fund, see the respective sections in the Prospectus and
Statement of Additional Information entitled "Distribution Plans."
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES
Generally, Class A Shares of the VK Fund are sold at net asset value
applicable at the time of such sale, plus a sales charge of up to 4.75% of the
offering price (which percentage is reduced on investments of $100,000 or more),
and are redeemable at their net asset value applicable at the time of
redemption. Class A shares of the AC Fund are sold at net asset value applicable
at the time of such sale, plus a sales charge of up to 4.75% of the offering
price (which percentage is reduced on investments of $100,000 or more), and are
7
<PAGE> 134
redeemable at their net asset value applicable at the time of redemption.
Purchases of Class A shares of the VK Fund or the AC Fund in amounts of
$1,000,000 or more are not subject to an initial sales charge but a contingent
deferred sales charge of 1.00% may be imposed on certain redemptions made within
the first year after purchase. Class A Shares of the VK Fund acquired in the
Reorganization will not be subject to a sales charge.
Generally, Class B shares do not incur a sales charge when they are
purchased, but are subject to a contingent deferred sales charge if redeemed
within a specified period of time from the date of purchase. Class B Shares of
the VK Fund are subject to a contingent deferred sales charge equal to 4.00% of
the lesser of the then current net asset value or the original purchase price on
Class B Shares redeemed during the first year after purchase, which charge is
reduced to zero over a six year period. Class B shares of the AC Fund are
subject to a contingent deferred sales charge equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
shares redeemed during the first year after purchase, which charge is reduced to
zero over a five year period. However, Class B Shares of the VK Fund acquired in
the Reorganization will be subject to a contingent deferred sales charge in
accordance with the same schedule that was applicable to Class B shares of the
AC Fund.
Generally, Class C shares do not incur a sales charge if redeemed after the
first year of purchase. Both Class C shares of the VK Fund and the AC Fund 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 such shares
redeemed during the first year after purchase and do not incur a sales charge if
redeemed after the first year from the date of purchase. See "Fee Comparisons"
below.
With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. eastern time. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share would have been $ on July
, 1995. The AC Fund, however, generally computes net asset value per share
by valuing fixed income securities using the last reported bid price. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share was $ on July , 1995.
In connection with the Reorganization, the net assets of the AC Fund will be
calculated using the current pricing methodology of the VK Fund.
The minimum initial investment with respect to each class of shares in the
VK Fund and the AC Fund is $500, although Shares of the VK Fund acquired in
connection with the Reorganization will not be subject to the minimum investment
limitation. The minimum subsequent investment in the VK Fund and the AC Fund is
$25. For a complete description of these arrangements with respect to the VK
Fund, see the section in the VK Fund Prospectus entitled "Purchasing Shares of
the Fund." For a complete description of these arrangements with respect to the
AC Fund, see the respective sections in the AC Fund's Prospectus and Statement
of Additional Information entitled "Purchase of Shares" and "Purchase and
Redemption of Shares."
Shares of either the AC Fund or the VK Fund may be purchased by check, by
electronic transfer or by bank wire and offer exchange privileges [among all]
other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors.
Shares of the VK Fund and the AC Fund properly presented for redemption may
be redeemed or exchanged at the next determined net asset value per share
(subject to any applicable deferred sales charge). Shares of either the AC Fund
or the VK Fund may be redeemed or exchanged by mail or by special
8
<PAGE> 135
redemption privileges (telephone exchange, telephone redemption by check, or
electronic transfer). If a shareholder of either fund attempts to redeem shares
within 15 days after they have been purchased by check, the respective fund may
delay payment of the redemption proceeds until such fund can verify that payment
for the purchase of the shares has been (or will be) received. No further
purchases of the shares of the AC Fund may be made after the date on which the
shareholders of the AC Fund approve the Reorganization, and the stock transfer
books of the AC Fund will be permanently closed as of the date of Closing. Only
redemption requests and transfer instructions received in proper form by the
close of business on the day prior to the date of Closing will be fulfilled by
the AC Fund. Redemption requests or transfer instructions received by the AC
Fund after that date will be treated by the AC Fund as requests for the
redemption or instructions for transfer of the shares of the VK Fund credited to
the accounts of the shareholders of the AC Fund. Redemption requests or transfer
instructions received by the AC Fund after the close of business on the day
prior to the date of Closing will be forwarded to the VK Fund. For a complete
description of these redemption arrangements, see the section in the VK Fund
Prospectus entitled "Redemption of Shares," and the respective sections in the
AC Fund's Prospectus and Statement of Additional Information entitled
"Redemption of Shares" and "Purchase and Redemption of Shares."
9
<PAGE> 136
The differences in the distribution, purchase and redemption procedures and
fee structure of the shares of the VK Fund and the shares of the AC Fund are
highlighted in the table below.
FEE COMPARISONS
<TABLE>
<CAPTION>
CLASS A SHARES VK FUND* AC FUND** PRO FORMA
- ----------------------------------------------------------- -------- --------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... 4.75%(1) 4.75% 4.75%(1)
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees............................................ 0.51% 0.57% 0.50%
Rule 12b-1 Fees............................................ 0.24%(4) 0.24% 0.20%
Other Expenses............................................. 0.22% 0.34% 0.23%
Total Fund Operating Expenses.................... 0.97% 1.15% 0.93%
CLASS B SHARES
- -----------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... None None None
Maximum Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds)... 4.00%(2) 4.00%(3) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees............................................ 0.51% 0.57% 0.50%
Rule 12b-1 Fees............................................ 1.00% 1.00% 1.00%
Other Expenses............................................. 0.29% 0.34% 0.30%
Total Fund Operating Expenses.................... 1.80% 1.91% 1.80%
CLASS C SHARES (5)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price)...................... None None None
Maximum Deferred Sales Charge (as a percentage of the lower
of the original purchase price or redemption proceeds)... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees............................................ 0.51% 0.57% 0.50%
Rule 12b-1 Fees............................................ 1.00% 1.00% 1.00%
Other Expenses............................................. 0.28% 0.32% 0.29%
Total Fund Operating Expenses.................... 1.79% 1.89% 1.79%
</TABLE>
- ---------------
(1) Class A shares of the VK Fund received pursuant to the Reorganization will
not be subject to a sales charge upon purchase.
(2) Class B shares of the VK Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B shares redeemed during the first
year after purchase, which charge is reduced to 0.00% over a six year
period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year
4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%; and
10
<PAGE> 137
Year 7 -- 0.00%. However, Class B Shares acquired in the Reorganization
will remain subject to the contingent deferred sales charge schedule
applicable to Class B shares of the AC Fund.
(3) Class B shares of the AC Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the original purchase price on Class B Shares redeemed during the first
year after purchase, which charge is reduced to 0.00% over a five year
period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year
4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
(4) As of July , 1995, the Rule 12b-1 fees for the VK Fund's Class A shares
was reduced from 0.30% to 0.25%. Due to pre-12b-1 plan assets, the
effective 12b-1 fee for the VK Fund was 0.24%.
(5) 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 on the original
purchase price on Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
* For the fiscal year ended December 31, 1994, except that Management Fees and
Total Fund Operating Expenses reflect the investment advisory fee structure
approved on July 21, 1995.
** For the fiscal year ended November 30, 1994.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the shares
of the VK Fund pursuant to the Reorganization. Additionally, the AC Fund would
not recognize any gain or loss as a result of the exchange of all of its assets
for the Shares of the VK Fund or as a result of its dissolution. The VK Fund
expects that it will not recognize any gain or loss as a result of the
Reorganization, that it will take a carryover basis in the assets acquired from
the AC Fund and that its holding period of such assets will include the period
during which the assets were held by the AC Fund. See "The Proposed
Reorganization -- Federal Income Tax Consequences."
The above information is only a summary of more complete information
contained in this Proxy Statement/Prospectus and the related Statement of
Additional Information.
REASONS FOR THE PROPOSED REORGANIZATION
On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from
The Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immediately
after the acquisition, American Capital Management & Research, Inc. was merged
into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed
Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser
currently are each wholly-owned subsidiaries of VKAC.
On February 10, 1995, the VK Board and the AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund in order to achieve certain economies of scale and
efficiencies, (ii) permitting exchangeability of shares between funds advised by
the VK Adviser and the AC Adviser, (iii) selecting a
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<PAGE> 138
common transfer agent to facilitate exchangeability and enhance shareholder
services, and (iv) consolidating the VK Board and the AC Board into a combined
board of trustees (collectively, the "Consolidation").
The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.
The VK Board and the AC Board held joint meetings on March 14, 1995 and
April 6-7, 1995 to review the findings and recommendations of the Joint
Committee. The VK Board approved each element of the Consolidation, including
the combination of the VK Fund with the AC Fund, on April 7, 1995, subject to
approval of the Consolidation by the AC Board. The AC Board met May 11, 1995,
and unanimously approved each element of the Consolidation, including the
combination of the VK Fund with the AC Fund. Each of the VK Board and the AC
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.
At separate shareholder meetings held on July 21, 1995, shareholders of the
VK Fund and the AC Fund approved the reorganization of the VK Fund and the AC
Fund into Delaware business trusts (or series thereof) and the combination of
the VK Board and the AC Board. Shareholders of the AC Fund are now being asked
to approve its combination with the VK Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) achieve economies of scale by combining the assets
of the funds and (iii) potentially reduce transaction costs and obtain greater
portfolio diversity.
In connection with approving the combination of the AC Fund with the VK
Fund, the AC Board considered the costs resulting from the separate operations
of the AC Fund and the VK Fund in light of their substantially similar
investment objective, policies and restrictions. The AC Board also considered
the potential expense savings, economies of scale, reduced per-share expenses
and benefits to the portfolio management process that could result from
combining the assets and operations of the AC Fund and the VK Fund. In this
regard, the AC Board reviewed information provided by the AC Adviser, VK Adviser
and VKAC Distributors relating to the anticipated cost savings to the
shareholders of the AC Fund and the VK Fund as a result of the Reorganization.
In particular, the AC Board considered the probability that the elimination
of duplicative operations and the increase in asset levels of the VK Fund after
the Reorganization would result in the following potential benefits for
investors, although there can, of course, be no assurances in this regard:
(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the AC Fund and
the VK Fund should eliminate duplication of services that currently exists
as a result of their separate operations. For example, currently the AC
Fund and the VK Fund are managed separately by different affiliated
investment entities. Consolidating the separate operations of the AC Fund
with those of the VK Fund should promote more efficient operations on a
more cost-effective basis.
(2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF
SCALE. Combining the net assets of the AC Fund with the assets of the VK
Fund also may lead to reduced expenses, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. An increase in the asset
levels of the VK Fund also could result in
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<PAGE> 139
achieving future economies of scale, which should also reduce per share
expenses. Any significant reductions in expenses on a per share basis
should, in turn, have a favorable effect on the relative total return of
the VK Fund.
(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset
levels also may enable the VK Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs and/or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.
In determining whether to recommend approval of the Reorganization to
shareholders of the AC Fund, the AC Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of VK Adviser and
other service providers to the VK Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees of the AC Fund and the VK
Fund before the Reorganization and of the VK Fund after the Reorganization; (3)
the comparative investment performance of the AC Fund and the VK Fund, as well
as the performance of the VK Fund compared to its peers; (4) the terms and
conditions of the Agreement and whether the Reorganization would result in
dilution of AC Fund shareholder interests; (5) the advantages of eliminating the
competition and duplication of effort inherent in marketing two funds having
similar investment objectives, in addition to the economies of scale realized
through the combination of the funds; (6) the compatibility of the funds'
service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; (7) the costs estimated to
be incurred by the respective funds as a result of the Reorganization; and (8)
the anticipated tax consequences of the Reorganization. Based upon these
factors, the AC Board determined that the Reorganization is in the best
interests of the shareholders of the AC Fund.
B. RISK FACTORS
NATURE OF INVESTMENT
Each of the VK Fund and the AC Fund invest primarily in a portfolio of tax
exempt insured municipal securities. Investment in either of the VK Fund or the
AC Fund may not be appropriate for all investors.
CHANGES IN CERTAIN INVESTMENT PRACTICES
Both the VK Fund and the AC Fund may engage in certain options and
financial futures transactions. However, the VK Fund has greater levels of
flexibility in pursuing its investment objectives through practices such as the
ability to make investments in securities of issuers that are new and unseasoned
or in securities having no ready market. Such transactions involve different
risks. See "The VK Fund" below. For a complete description of the VK Fund's
investment practices, see the section in the VK Fund Prospectus entitled
"Investment Practices" and "Investment Objective and Policies" and the section
of the VK Fund's Statement of Additional Information entitled "Additional
Investment Considerations."
C. INFORMATION ABOUT THE FUNDS
VK Fund. Information about the VK Fund is included in its current
Prospectus dated , which accompanies this Proxy Statement/Prospectus.
Additional information about the VK Fund is included in its current Statement of
Additional Information dated the same date as the Prospectus. Copies of the VK
Fund's Statement of Additional Information may be obtained without charge by
calling (800) 225-2222, ext. 6504. The VK Fund files proxy material, reports and
other information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch,
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<PAGE> 140
Office of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549 at prescribed rates.
AC Fund. Information about the AC Fund is included in its current
Prospectus dated . Additional information about the AC Fund is
included in the Statement of Additional Information dated the same date as the
Prospectus. Copies of the AC Funds Statement of Additional Information may be
obtained without charge by calling (800) 421-5666. The AC Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Service, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.
The VK Fund, as a series of VKAC Tax Free Fund, a Delaware business trust,
and the AC Fund, as a Delaware business trust, are governed by their respective
Agreements and Declarations of Trust (each, the "Declaration"), their respective
Bylaws and applicable Delaware law.
D. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary
does not purport to be complete and is subject in all respects to the provisions
of, and is qualified in its entirety by reference to, the Agreement, a copy of
which is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote is required to approve the Agreement at a
meeting of shareholders at which a quorum is present.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the VK Fund series of the VKAC Tax Free Fund
will acquire all of the assets and the liabilities of the AC Fund on the date of
the Closing in exchange for Class A, B and C Shares, respectively, of the VK
Fund.
Subject to AC Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or such later date as soon as practicable thereafter as the VK
Fund and the AC Fund may mutually agree.
On the date of Closing, the AC Fund will transfer to the VK Fund all of the
assets and liabilities of the AC Fund. The VKAC Tax Free Fund will in turn
transfer to the AC Fund a number of Class A, B and C Shares of the VK Fund equal
in value to the net asset value of the assets of the AC Fund transferred to the
VK Fund as of the date of Closing as determined in accordance with the valuation
method described in the VK Fund's then current prospectus.
The AC Fund expects to distribute the Class A, B and C Shares of the VK
Fund to the holders of Class A, B and C shares of the AC Fund, as the case may
be, promptly after the Closing. The AC Fund will then dissolve pursuant to a
plan of liquidation and dissolution adopted by the AC Board.
The AC Fund and the VKAC Tax Free Fund have made certain standard
representations and warranties to each other regarding their respective
capitalizations, status and conduct of business.
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<PAGE> 141
Unless waived in accordance with the Agreement, the obligations of the
parties to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the AC Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or
governmental proceeding preventing or seeking to prevent the
consummation of the transactions contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state securities laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties agreements,
obligations and covenants required by the agreements;
5. the effectiveness of this Proxy Statement/Prospectus under applicable
law and obtaining of any approvals, registrations or exemptions under
federal and state securities laws; and
6. the receipt of opinions of counsel relating to, among other things,
the tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the AC
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of AC Fund shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.
The AC Board recommends that you vote to approve the Agreement, as it
believes the Reorganization is in the best interests of the AC Fund's
shareholders and that the interests of AC Fund's existing shareholders will not
be diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST
Beneficial interests in the VK Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The VKAC Tax
Free Fund's Declaration permits the trustees of the VKAC Tax Free Fund, as they
deem necessary or desirable, to create one or more separate investment
portfolios and to issue a separate series of shares for each portfolio and
subject to compliance with the Act to further sub-divide the shares of a series
into one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS
Holders of shares of the VK Fund are entitled to one vote per share on
matters as to which they are entitled to vote; however, separate votes generally
are taken by each series on matters affecting an individual series. The
Declaration of VKAC Equity Trust and the Declaration of AC Fund are
substantially identical, except that the Declaration of the VKAC Equity Trust
permits the VK Board or shareholders to remove a trustee with or without cause
by the act of two-thirds of such trustees or shareholders, respectively. The
Declaration of the AC Fund permits (i) the AC Board to remove a trustee with
cause by the act of two-thirds of the trustees and (ii) shareholders holding a
majority of the shares of each series outstanding to remove a
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<PAGE> 142
trustee with or without cause. The Declaration of the AC Fund also requires the
approval of 80% of the trustees in office or majority vote of the shares of each
series then outstanding to amend these provisions.
Each of the VK Fund and the AC Fund operate as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
VK Fund, as well as shareholders of the AC Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VK Fund will establish an account
for each AC Fund shareholder containing the appropriate number of Shares of the
VK Fund. The shareholder services and shareholder programs of the VK Fund and
the AC Fund have already been substantially conformed as part of the
Consolidation. Shareholders of the AC Fund who are accumulating AC Fund shares
under the dividend reinvestment plan, or who are receiving payment under the
systematic withdrawal plan with respect to AC Fund shares, will retain the same
rights and privileges after the Reorganization in connection with the VK Fund
Class A, B or C Shares, respectively, received in the Reorganization through
substantially similar plans maintained by the VKAC Tax Free Fund. In the case of
shares of the AC Fund held in IRA accounts, the corresponding Shares of the VK
Fund will be credited to a new IRA account maintained in the name of the
shareholder by Van Kampen American Capital Trust Company, an affiliate of VKAC
that acts as the custodian of IRA accounts for VKAC Distributors-sponsored
open-end management mutual funds. Such IRA investors will be sent appropriate
documentation to confirm Van Kampen American Capital Trust Company's
custodianship.
It will not be necessary for shareholders of the AC Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the AC Fund, such certificates will become null and void.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the AC Fund and
shareholders of the VK Fund. It is based upon the Code, Treasury regulations,
judicial authorities, published positions of the Internal Revenue Service (the
"Service") and other relevant authorities, all as in effect on the date hereof
and all of which are subject to change or different interpretations (possibly on
a retroactive basis). This summary is limited to shareholders who hold their AC
Fund shares as capital assets. No advance rulings have been or will be sought
from the Service regarding any matter discussed in this Proxy
Statement/Prospectus. Accordingly, no assurances can be given that the Service
could not successfully challenge the intended federal income tax treatment
described below. Shareholders should consult their own tax advisors to determine
the specific federal income tax consequences of all transactions relating to the
Reorganization, as well as the effects of state, local and foreign tax laws.
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<PAGE> 143
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code. It is a condition to closing that
the VK Fund and the AC Fund receive an opinion from O'Melveny & Myers to the
effect that, based on and subject to the foregoing for federal income tax
purposes:
1. The acquisition and assumption by the VKAC Tax Free Fund of the assets
and the liabilities of the AC Fund in exchange solely for Class A, B or
C Shares of the VK Fund will qualify as a tax-free reorganization
within the meaning of Section 368(a)(1)(C) of the Code.
2. No gain or loss will be recognized by the AC Fund or the VK Fund upon
the transfer, and assumption by the VK Fund of the assets and the
liabilities of the AC Fund in exchange solely for the Class A, B or C
Shares of the VK Fund.
3. The VK Fund's basis in the AC Fund assets received in the Reorganization
will, in each instance, equal the basis of such assets in the hands of
the AC Fund immediately prior to the transfer, and the VK Fund's holding
period of such assets will, in each instance, include the period during
which the assets were held by the AC Fund.
4. No gain or loss will be recognized by the shareholders of the AC Fund
upon the exchange of their shares of the AC Fund solely for the Class A,
B or C Shares, respectively, of the VK Fund.
5. The tax basis of the Class A, B and C Shares of the VK Fund received by
the shareholders of the AC Fund will be the same as the tax basis of the
shares of the AC Fund surrendered in exchange therefor.
6. The holding period of the Class A, B and C Shares of the VK Fund
received by the shareholders of the AC Fund will include the holding
period of the shares of the AC Fund surrendered in exchange therefor.
In rendering its opinion, O'Melveny & Myers may rely upon certain
representations of the management of the AC Fund and the VKAC Equity Trust and
it has assumed, for purposes of such opinion, that the Reorganization will be
consummated as described in the Agreement and that redemptions of shares of the
AC Fund occurring prior to the Closing will consist solely of redemptions in the
ordinary course of business.
The VK Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the AC Fund and its shareholders.
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<PAGE> 144
CAPITALIZATION
The following table sets forth the capitalization of the AC Fund and the VK
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.
CAPITALIZATION TABLE AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
VK FUND AC FUND PRO FORMA
-------------- ------------ --------------
<S> <C> <C> <C>
Net assets
Class A shares(1)............................. $1,185,694,970 $ 67,027,202 $1,252,542,963
Class B shares................................ 32,859,977 36,534,187 69,384,237
Class C shares................................ 3,774,082 2,264,918 6,038,136
-------------- ------------ --------------
Total................................. $1,222,329,029 $105,826,307 $1,327,965,336
============= =========== =============
Net asset value per share
Class A shares................................ $18.60 $11.09 $18.60
Class B shares................................ 18.59 11.09 18.59
Class C shares................................ 18.59 11.08 18.59
Shares outstanding
Class A shares................................ 63,753,108(1) 6,042,102 67,356,721
Class B shares................................ 1,767,707 3,294,528 3,732,967
Class C shares................................ 202,971 204,359 324,806
-------------- ------------ --------------
Total................................. 65,723,786 9,540,989 71,414,494
============= =========== =============
Shares authorized
Class A shares................................ Unlimited Unlimited Unlimited
Class B shares................................ Unlimited Unlimited Unlimited
Class C shares................................ Unlimited Unlimited Unlimited
</TABLE>
- ---------------
(1) Includes $27,486 and 1,478 shares representing Class D Shares which were
outstanding as of March 31, 1995 exchanged into Class A Shares of the VK
Fund on , 1995.
(2) Pro Forma net assets and net asset value per share reflect one-time
combination costs of approximately $190,000 or $.003 per share.
COMPARATIVE PERFORMANCE INFORMATION
The average annual total return for the AC Fund for the one-year,
three-year and five-year periods ended March 31, 1995 and for the period
beginning since inception through March 31, 1995 were 0.20%, 4.16%, 5.76% and
5.21% in respect of its Class A shares; for the one year period ended March 31,
1995 and for the period beginning since inception through March 31, 1995 were
0.55% and 2.91% in respect of Class B Shares (inception July 20, 1992) and 3.45%
and 0.80% in respect of Class C Shares (inception December 10, 1993). The
average annual total return for the VK Fund for the one-year, three-year,
five-year and ten-year periods ended March 31, 1995 were 1.99%, 5.42%, 6.81% and
9.17% in respect of its Class A Shares; for the one year period ended March 31,
1995 and for the period beginning since inception through March 31, 1995 were
2.24% and 0.98% in respect of Class B Shares (inception April 30, 1993) and
5.18% and 1.37% in respect of Class C Shares (inception August 13, 1993). The
foregoing returns include the effect of the maximum sales
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<PAGE> 145
charge applicable to sales of Shares of the VK Fund, which is not being charged
to shareholders of the AC Fund in connection with the Reorganization.
The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE VK FUND
Approval of the Reorganization will constitute the ratification by AC Fund
shareholders of the investment objective, policies and restrictions of the VK
Fund. For a discussion of the investment objective, policies and restrictions of
the VK Fund, see "Summary -- Comparison of the VK Fund and AC Fund" and the
Prospectus of the VK Fund accompanying this Proxy Statement/Prospectus. Approval
of the Reorganization will constitute approval of amendments to any of the
fundamental investment restrictions of the AC Fund that might otherwise be
interpreted as impeding the Reorganization, but solely for the purpose of and to
the extent necessary for, consummation of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the issuance of Class A, B and C Shares of
the VK Fund will be passed on by Skadden, Arps, Slate, Meagher & Flom, 333 West
Wacker Drive, Chicago, Illinois 60606, which serves as counsel to the VK Fund.
Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a Trustee
of the VKAC Equity Trust. On July 21, 1995, Mr. Whalen was elected as a Trustee
of the AC Fund.
Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by O'Melveny & Myers, 400 South Hope Street,
Los Angeles, California 90071, which serves as counsel to AC Fund. Lawrence J.
Sheehan, a former partner of O'Melveny & Myers and currently of counsel with
said firm, is a Trustee of the AC Fund. On July 21, 1995, Mr. Sheehan was
elected as a Trustee of the VKAC Equity Trust.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the AC
Fund will be borne by the VK Fund after the Reorganization. Accordingly, the VK
Fund and its shareholders after the Reorganization will bear such expenses of
the Reorganization. The AC Board has determined that the arrangements regarding
the payment of expenses and other charges relating to the Reorganization are
fair and equitable.
E. RECOMMENDATION OF THE AC BOARD
The AC Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of the shareholders
of the AC Fund. THE AC BOARD RECOMMENDS VOTING FOR THE PROPOSED REORGANIZATION.
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<PAGE> 146
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING
It is not anticipated that any action will be asked of the shareholders of
the AC Fund other than as indicated above, but if other matters are properly
brought before the Special Meeting, it is intended that the persons named in the
proxy will vote in accordance with their judgment.
OTHER INFORMATION
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND
At the close of business on [ ], 1995, the record date for the
Meeting, there were [ ] Class A, [ ] Class B and [ ] Class C shares,
respectively, of the AC Fund outstanding and entitled to vote at the meeting. As
of such date, no person was known by the AC Fund to own of record or
"beneficially" five percent or more of the outstanding shares of the AC Fund as
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, as amended. At the close of business on March 31, 1995, there were
63,751,630 Class A, 1,767,707 Class B and 202,971 Class C Shares, respectively,
of the VK Fund outstanding. As of such date, no person was known by the VKAC Tax
Free Fund to own of record or "beneficially" five percent or more of the
outstanding shares of the VK Fund as determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
The amount of the AC Fund shares owned by the trustees and officers of the
AC Fund as a group as of [ ], 1995 was [ ] Class A, [ ] Class B
and [ ] Class C Shares, respectively, or [ ]% of Class A, [ ]% of
Class B and [ ]% of Class C of the AC Fund's outstanding shares. No trustee
or officer of the AC Fund owned in excess of 1% of the AC Fund Shares as of such
date. The amount of the VK Fund shares owned by the trustees and officers of the
VKAC Tax Free Fund as a group as of [ ], 1995 was [ ] Shares. No
trustee or officer of the VKAC Tax Free Fund owned in excess of 1% of the VK
Fund Shares.
B. SHAREHOLDER PROPOSALS
As a general matter, the AC Fund does not intend to hold future regular
annual or special meetings of shareholders unless required by the Act. Any
shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the VK Fund should send such proposal to the VK Fund at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be considered for
presentation at a shareholders' meeting, rules promulgated by the SEC require
that, among other things, a shareholder's proposal must be received at the
offices of the VK Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
VOTING INFORMATION AND REQUIREMENTS
Each valid proxy given by a shareholder of the AC Fund will be voted by the
person named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the AC Board "FOR"
approval of the Reorganization.
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<PAGE> 147
Shareholders who execute proxies may revoke them at any time before they
are voted by filing with the Fund a written notice of revocation, by delivering
a duly executed proxy bearing a later date, or by attending the Special Meeting
and voting in person.
The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.
The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. Approval of the Proposal will require the favorable vote of the
holders of a majority of the outstanding shares of the AC Fund entitled to vote
at the Special Meeting at which a quorum is constituted. Shares not voted with
respect to a proposal due to an abstention or broker non-vote will be deemed
votes not cast with respect to such proposal, but such shares will be deemed
present for quorum purposes.
In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Special Meeting, the persons named in the
proxy may propose and vote in favor of one or more adjournments of the Special
Meeting to permit further solicitation of proxies. If sufficient shares were
present to constitute a quorum, but insufficient votes had been cast in favor of
the Reorganization to approve it, proxies would be voted in favor of adjournment
only if the Board of Trustees determined that adjournment and additional
solicitation was reasonable and in the best interest of the shareholders of the
AC Fund, taking into account the nature of the proposal, the percentage of the
votes actually cast, the percentage of negative votes, the nature of any further
solicitation that might be made and the information provided to shareholders
about the reasons for additional solicitation. Any such adjournment will require
the affirmative vote of the holders of a majority of the outstanding shares
voted at the session of the Special Meeting to be adjourned.
Proxies of shareholders of the AC Fund are solicited by the AC Board. The
cost of solicitation will be paid by the VK Fund after the Reorganization.
Additional solicitation may be made by mail, personal interview, telephone,
facsimile and telegraph by personnel of the AC Fund or AC Adviser who will not
be additionally compensated therefor.
[ ], 1995
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
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<PAGE> 148
VAN KAMPEN AMERICAN CAPITAL TAX FREE FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
---------------------
This Statement of Additional Information provides information about the Van
Kampen American Capital Insured Tax Free Income Fund (the "VK Fund"), a series
of the Van Kampen American Capital Tax Free Fund ("VKAC Tax Free Fund"), an
open-end, series management investment company, in addition to information
contained in the Proxy Statement/Prospectus of the VKAC Tax Free Fund, dated May
, 1995, which also serves as the Proxy Statement of the Van Kampen American
Capital Insured Municipal Portfolio (the "AC Fund"), in connection with the
issuance of Class A, B and C shares of the VK Fund to shareholders of the AC
Fund. This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the Proxy Statement/Prospectus, into which it has been
incorporated by reference and which may be obtained by contacting the VKAC Tax
Free Fund located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(telephone no. (708) 684-6000 or (800) 225-2222) or the AC Fund located at 2800
Post Oak Boulevard, Houston, Texas 77056 (telephone no. (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the AC Fund................................................ 2
Additional Information About the VK Fund and the VKAC Tax Free Fund................... 2
Additional Information About the AC Fund.............................................. 2
Financial Statements.................................................................. 2
Pro Forma Financial Statements........................................................ 2
</TABLE>
The VKAC Tax Free Fund will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
1
<PAGE> 149
PROPOSED REORGANIZATION OF THE AC FUND
The shareholders of the AC Fund are being asked to approve the sale of all
the assets and liabilities of the AC Fund in exchange for Class A, B and C
Shares of the VK Fund, a series of the VKAC Tax Free Fund (the
"Reorganization").
For detailed information about the Reorganization, shareholders should
refer to the Proxy Statement/ Prospectus.
ADDITIONAL INFORMATION ABOUT THE VK FUND AND THE VKAC TAX FREE FUND
Incorporated herein by reference to the Statement of Additional Information
of the VK Fund, dated [ ], 1995, attached as Appendix A to this
Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE AC FUND
Incorporated herein by reference to the Statement of Additional Information
of the AC Fund, dated [ ], 1995, attached as Appendix B to this
Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in its entirety is (i) the audited
financial statements of the VK Fund for fiscal year ended December 31, 1994,
attached as Appendix C to this Statement of Additional Information, and (ii) the
audited financial statements of the AC Fund for fiscal year ended November 30,
1994, attached as Appendix D to this Statement of Additional Information.
PRO FORMA FINANCIAL STATEMENTS
In connection with the Reorganization, the VK Fund will acquire all of the
assets of the AC Fund in exchange for a number of shares of the VK Fund equal to
the net asset value of such assets of the AC Fund being acquired. Based on the
respective net asset values of the VK Fund and the AC Fund as of May 19, 1995,
the net asset value of the AC Fund does not exceed 10% of the VK Fund's net
asset value. Accordingly, pro forma financial statements are not included
herein.
2
<PAGE> 150
APPENDIX A
VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
[TO COME]
<PAGE> 151
APPENDIX B
VAN KAMPEN AMERICAN CAPITAL
INSURED MUNICIPAL PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 1995
[TO COME]
<PAGE> 152
Appendix C
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
C-1
<PAGE> 153
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
C-2
<PAGE> 154
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
C-3
<PAGE> 155
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
C-4
<PAGE> 156
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
C-5
<PAGE> 157
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
C-6
<PAGE> 158
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
C-7
<PAGE> 159
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
C-8
<PAGE> 160
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
C-9
<PAGE> 161
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
C-10
<PAGE> 162
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
C-11
<PAGE> 163
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
C-12
<PAGE> 164
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
C-13
<PAGE> 165
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) <Note 1>..................................... $ 1,134,367,200
Short-Term Investments <Note 1>................................................................. 13,300,000
Receivables:
Interest........................................................................................ 18,601,231
Investments Sold................................................................................ 2,350,354
Fund Shares Sold................................................................................ 750,384
Margin on Futures <Note 5>...................................................................... 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 <Note 2>................................................................ 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 <Note 3>........................................................................ $ 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) <Note 3>....................... $ 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) <Note 3>........................ $ 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) <Note 3>.......................... $ 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) <Note 3>.............................. $ 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
C-14
<PAGE> 166
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 <Note 2>.................................................................. 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) <Note 6>............................................................ 3,121,827
Shareholder Services ............................................................................. 1,726,834
Legal <Note 2>.................................................................................... 110,910
Insurance <Note 1>................................................................................ 69,569
Trustees Fees and Expenses <Note 2>............................................................... 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
C-15
<PAGE> 167
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 <Note 3>
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
C-16
<PAGE> 168
VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
period........... $ 19.857 $ 18.721 $18.478 $17.825 $17.798 $17.394 $16.700 $17.945 $16.189 $14.474
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net investment
income......... 1.051 1.107 1.146 1.153 1.160 1.182 1.184 1.198 1.249 1.220
Net realized and
unrealized
gain/loss on
investments.... (2.280) 1.145 .561 .681 .037 .391 .682 (1.226) 1.846 1.780
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations....... (1.229) 2.252 1.707 1.834 1.197 1.573 1.866 (.028) 3.095 3.000
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
LESS:
Distributions
from net
investment
income......... 1.056 1.116 1.140 1.160 1.170 1.169 1.172 1.215 1.231 1.285
Distributions
from net
realized gain
on
investments.... 0 0 .324 .021 0 0 0 .002 .108 0
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions.... 1.056 1.116 1.464 1.181 1.170 1.169 1.172 1.217 1.339 1.285
-------- -------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of
period........... $ 17.572 $ 19.857 $18.721 $18.478 $17.825 $17.798 $17.394 $16.700 $17.945 $16.189
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN
(non-annualized). (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37% 11.48% .27% 19.73% 21.08%
Net assets at end
of period
(in millions).... $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0 $ 555.3 $ 502.5 $ 418.1 $ 188.2
Ratio of expenses
to average net
assets
(annualized)..... .88% .84% .83% .88% .87% .88% .85% .71% .76% .89%
Ratio of net
investment
income to average
net assets
(annualized)..... 5.70% 5.69% 6.14% 6.39% 6.63% 6.73% 6.92% 7.04% 7.07% 8.00%
Portfolio
Turnover......... 48.46% 78.73% 111.90% 113.25% 107.79% 81.28% 132.85% 119.89% 31.00% 98.19%
</TABLE>
See Notes to Financial Statements
C-17
<PAGE> 169
VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
-------------------------------
MAY 1, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period............................. $ 19.824 $ 19.320
-------- --------
Net investment income.......................................... .899 .619
Net realized and unrealized gain/loss on investments........... (2.276) .513
-------- --------
Total from investment operations................................. (1.377) 1.132
LESS DISTRIBUTIONS FROM NET INVESTMENT INCOME.................... .884 .628
-------- --------
Net asset value, end of period................................... $ 17.563 $ 19.824
======== ========
TOTAL RETURN (non-annualized).................................... (7.03%) 5.92%
Net assets at end of period (in millions)........................ $ 30.0 $ 20.8
Ratio of expenses to average net assets (annualized)............. 1.71% 1.68%
Ratio of net investment income to average net assets
(annualized)................................................... 4.88% 4.25%
Portfolio turnover............................................... 48.46% 78.73%
</TABLE>
See Notes to Financial Statements
C-18
<PAGE> 170
VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31,
1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period........................... $ 19.823 $ 19.650
-------- --------
Net investment income........................................ .908 .350
Net realized and unrealized gain/loss on investments......... (2.279) .181
-------- --------
Total from investment operations............................... (1.371) .531
Less distributions from net investment income.................. .884 .358
-------- --------
Net asset value, end of period................................. $ 17.568 $ 19.823
======== ========
TOTAL RETURN (non-annualized).................................. (6.98%) 2.70%
Net assets at end of period (in millions)...................... $ 3.5 $ 5.0
Ratio of expenses to average net assets (annualized)........... 1.70% 1.68%
Ratio of net investment income to average net assets
(annualized)................................................. 4.89% 4.21%
Portfolio turnover............................................. 48.46% 78.73%
</TABLE>
See Notes to Financial Statements
C-19
<PAGE> 171
VAN KAMPEN MERRITT INSURED TAX FREE INCOME FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS D SHARES
----------------
MARCH 14, 1994
(COMMENCEMENT OF
DISTRIBUTION) TO
DECEMBER 31,
1994
- ----------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period....................................... $ 18.890
--------
Net investment income.................................................... .811
Net realized and unrealized loss on investments.......................... (1.313)
--------
Total from investment operations........................................... (.502)
Less distributions from net investment income.............................. .820
--------
Net asset value, end of period............................................. $ 17.568
========
TOTAL RETURN (non-annualized).............................................. (2.68%)
Net assets at end of period (in thousands)................................. $ 2.0
Ratio of expenses to average net assets (annualized)....................... .97%
Ratio of net investment income to average net assets (annualized).......... 5.64%
Portfolio turnover......................................................... 48.46%
</TABLE>
See Notes to Financial Statements
C-20
<PAGE> 172
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.
C-21
<PAGE> 173
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.
C-22
<PAGE> 174
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.
C-23
<PAGE> 175
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
C-24
<PAGE> 176
APPENDIX D
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 96.6%
EDUCATION 4.7%
$ 500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07.................... $ 587,605
1,000,000 Corona-Norco, California, University School District Lease Rev., FSA,
6.00%, 4/15/19........................................................ 868,080
425,000 Earlimart, California, Elementary School District, Series 1, AMBAC,
6.70%, 8/1/21......................................................... 397,056
500,000 Indiana State University Rev., Building 3 (Student Fee) Series E,
MBIA, 7.375%, 10/1/10................................................. 540,505
1,000,000 Pennsylvania State Higher Education, Assistance Agency, Student
Loan Rev., Series D, AMBAC, 6.05%, 1/1/19............................. 875,440
1,000,000 University of Washington, Housing & Dining Rev., MBIA, 7.00%, 12/1/21.... 1,006,620
750,000 Wisconsin State Health & Educational Facilities Rev.,
FGIC 6.25%, 12/1/10................................................... 695,685
------------
TOTAL EDUCATION....................................................... 4,970,991
------------
GENERAL OBLIGATIONS 6.9%
1,000,000 Berwyn Illinois Corp., MBIA, 7.00%, 11/15/10............................. 1,002,370
1,075,000 Cicero, Illinois, Refunding, Tax Increment, Series A, MBIA,
5.70%, 12/1/13........................................................ 921,318
245,000 Henderson, Texas, Limited Tax, AMBAC, 9.125%, 5/15/04.................... 295,499
1,000,000 Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series-92, 8.10%, 12/1/11........................ 1,026,280
800,000 Regional Transportation Authority, Illinois, Series A, AMBAC,
6.125%, 6/1/22........................................................ 696,296
1,000,000 St. Clair County, Illinois, FGIC, 5.75%, 10/1/15......................... 843,680
965,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23............ 925,049
500,000 Travis County, Texas, Series A, MBIA, 5.50%, 3/1/03...................... 480,095
1,000,000 Webb County, Texas, Limited Tax, CGIC, Series-89,
7.25%, 2/15/09........................................................ 1,053,340
------------
TOTAL GENERAL OBLIGATIONS............................................. 7,243,927
------------
HOSPITALS 28.5%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project)
AMBAC, 5.75%, 8/15/22................................................. 412,400
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev.
(Bon Secours Health System Project) FSA, 5.625%, 8/15/25.............. 801,320
190,000 Clermont County, Ohio, Hospital Facilities Rev. (Mercy Health Care
System) Series A, AMBAC, 9.75%, 9/1/13................................ 200,805
750,000 Decatur, Illinois, Health Care Facilities Rev. (DMH Community
Services Corp. Project) BIG, 8.10%, 11/15/18.......................... 793,597
750,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital
MedLantic) Series A, MBIA, 7.10%, 11/1/11............................. 756,037
500,000 Florence County, South Carolina, Hospital Rev. (McLeod Regional
Medical Center Project) Series B, FGIC, 8.75%, 11/1/09,
Pre-refunded, 11/1/95................................................. 528,030
1,650,000 Fort Wayne, Indiana, Hospital Authority Rev. (Ancilla Health
Systems, Inc.) Series C, BIG, 8.125%, 7/1/18, Pre-refunded, 1/1/99 ... 1,826,550
1,250,000 Harris County, Texas Health Facilities, (Development Corp. Thermal
Utility Rev.), Series A, AMBAC, 7.25%, 2/15/15........................ 1,275,050
1,500,000 Harris County, Texas, Hospital District Mtg. Rev., BIG,
8.50%, 4/1/15, Pre-refunded, 4/1/96.................................... 1,594,950
</TABLE>
D-1
<PAGE> 177
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-continued
Illinois Health Facilities Authority Rev.
$ 1,685,000 Brokaw Mennonite Association, FGIC, 8.00%, 8/15/17.................. $ 1,843,441
775,000 Franciscan Sisters Health Project, MBIA, 7.875%, 9/1/18............. 836,644
1,695,000 Sisters of St. Mary's Health Care, Series B, MBIA, 8.00%, 6/1/14.... 1,850,703
Indiana Health Facility Financing Authority (Lutheran Hospital
Indiana, Inc.)
1,000,000 MBIA, 6.85%, 7/1/22................................................. 964,000
1,000,000 AMBAC, 7.00%, 2/15/19............................................... 995,230
500,000 Kent Hospital Finance Authority, Michigan Hospital Facility Rev.
(Pine Rest Christian Hospital Association) FGIC, 9.00%, 11/1/10..... 529,140
1,000,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital
Project) AMBAC, 6.70%, 5/1/12....................................... 970,970
1,000,000 Louisiana Public Facilities Authority, Health & Educational Capital
Facilities Rev. (Our Lady of the Lake Medical Center) Series A,
BIG, 8.20%, 12/1/15................................................. 1,075,660
Louisiana Public Facilities Authority, Hospital Rev.
500,000 Southern Baptist Hospital Project, FSA, 6.80%, 5/15/12.............. 493,940
500,000 Touro Infirmary Project, Series A, BIG, 8.00%, 6/1/09............... 545,930
500,000 Maine Health & Higher Educational Facilities Authority Rev.,
Series-91, FSA, 6.375%, 7/1/21...................................... 455,490
250,000 Marion County, Florida, Hospital District Rev., Refunding, Ocala,
Florida (Munroe Regional Medical Center) FGIC,
6.25%, 10/1/12...................................................... 230,798
Massachusetts State Health & Educational Facilities Authority Rev.
1,000,000 Children's Hospital Corp., Series B, 11.00%, 1/1/05................. 1,024,270
1,000,000 University Hospital, Series C, MBIA, 7.25%, 7/1/19.................. 1,017,370
500,000 Mississippi, Hospital Equipment & Facilities (Wesley Health
System, Inc.) CONN, Series A, 6.05%, 4/1/12......................... 436,805
475,000 Missouri State Health & Educational Facilities Authority Rev.,
Heartland Health Systems Project, AMBAC, 6.35%, 11/15/17............ 437,428
500,000 North Central Texas, Health Facility Development Corp. Rev.
(Presbyterian Healthcare Project) Series B, BIG,
8.875%, 12/1/15, Pre-refunded, 12/1/97.............................. 556,025
1,000,000 Parish of Jefferson, Louisiana, Hospital Services (West Jefferson
General Hospital Project) FGIC, 9.875%, 1/1/10...................... 1,024,280
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series H-2,
AMBAC, 7.625%, 12/1/15.............................................. 1,068,360
1,000,000 St. Joseph County, Indiana, Hospital Authority, Hospital Facilities
Rev. (Memorial Hospital South Bend Project) MBIA,
6.25%, 8/15/12...................................................... 924,320
280,000 Waco, Texas, Health Facilities Development Corp., Hospital Rev.
(Hillcrest Baptist Medical Center) MBIA, 9.20%, 9/1/14,
Pre-refunded, 9/1/95................................................ 294,798
Washington State Health Care Facilities Authority Rev.,
Refunding, MBIA
1,395,000 Empire Health Services Spokane, 8.375%, 11/1/06..................... 1,529,311
1,000,000 Virginia-Mason Medical Center, 8.00%, 7/1/15........................ 1,060,380
500,000 West Virginia State Hospital Finance Authority, Hospital Rev.
(Monongalia General Hospital) BIG, 8.60%, 7/1/17,
Pre-refunded, 7/1/97................................................ 538,100
1,000,000 Wisconsin State Health & Educational Rev. (Milwaukee Regional
Medical Center, Inc. Project) AMBAC, 7.50%, 8/1/11.................. 1,012,400
------------
TOTAL HOSPITALS..................................................... 29,904,532
------------
</TABLE>
D-2
<PAGE> 178
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING 4.3%
$ 265,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B,
9.25%, 4/1/16..................................................... $ 271,503
1,280,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10..................................... 1,170,214
960,000 Louisiana Public Facilities Authority, Multi-family Housing Rev.
(One Lakeshore Place Apartments) 9.25%, 7/20/20................... 993,658
1,195,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26..................................................... 1,121,209
1,000,000 South Dakota State Housing Development Authority, 6.85%, 5/1/26...... 971,250
------------
TOTAL HOUSING..................................................... 4,527,834
------------
INDUSTRIAL DEVELOPMENT REVENUE 4.0%
2,000,000 Clark County, Nevada (Nevada Power Co. Project), AMBAC,
7.20%, 10/1/22.................................................... 2,019,340
850,000 Manatee County, Florida (Manatee Hospital & Health System) MBIA,
8.25%, 8/15/14.................................................... 907,996
720,000 Pima County, Arizona, Refunding, FSA, 7.25%, 7/15/10................. 723,542
500,000 Parish of St. Charles, Louisiana, Solid Waste Disposal Rev.,
7.05, 4/1/22...................................................... 498,730
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.............................. 4,149,608
------------
MISCELLANEOUS 6.9%
600,000 Arizona State Municipal Financing Program, Certificates of
Participation, Series 17, BIG, 8.125%, 8/1/17..................... 635,088
1,000,000 Charleston County, South Carolina, Certificates of Participation,
Charleston Public Facilities Corp., MBIA, 7.10%, 6/1/11........... 1,072,130
875,000 Chicago, Illinois, Public Building Commission, Building Rev.
(Community College, District #508) Series B, BIG,
8.75%, 1/1/07..................................................... 937,807
1,000,000 Dade County, Florida, Special Obligation (Miami Beach Convention
Center Project) Series B, FGIC, 8.80%, 12/1/02.................... 1,097,280
310,000 Louisiana Public Facilities Authority Rev. (Medical Center Louisiana
at New Orleans Project) CONN, 6.25%, 10/15/10..................... 290,148
1,000,000 Pennsylvania Convention Center Authority Rev., Series A, FGIC,
6.00%, 9/1/19..................................................... 906,920
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding
Lease, Series A, FGIC, 5.625%, 11/15/14........................... 1,289,190
1,000,000 South Dakota, Lease Rev., Series A, CGIC, 6.625%, 9/1/12............. 956,690
------------
TOTAL MISCELLANEOUS............................................... 7,185,253
------------
MUNICIPAL UTILITY DISTRICT 0.7%
425,000 Maple Run at Austin, Texas Contract, Rev., FGIC, 8.25%, 11/15/05..... 456,238
250,000 Montgomery County, Texas, MBIA, 6.25%, 3/1/14........................ 235,838
------------
TOTAL MUNICIPAL UTILITY DISTRICT.................................. 692,076
------------
POLLUTION CONTROL REVENUE 14.2%
Beaver County, Pennsylvania, Industrial Development Authority,
Refunding (Ohio Edison Co. Mansfield), Series A, FGIC
1,000,000 7.10%, 6/1/18..................................................... 990,980
500,000 7.75%, 9/1/24..................................................... 531,030
</TABLE>
D-3
<PAGE> 179
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE-continued
Brazos River Authority, Texas, Rev.
$ 1,870,000 Houston Lighting & Power, Refunding, Series B, FGIC,
7.20%, 12/1/18...................................................... $ 1,941,153
1,000,000 Series C, BIG, 8.10%, 5/1/19........................................ 1,074,210
1,270,000 Texas Utilities Electric Co., FGIC, 9.875%, 10/1/17................. 1,419,136
1,000,000 Emery County, Utah, Refunding (Pacificorp Project) Series A,
AMBAC, 5.65%, 11/1/23............................................... 808,160
1,000,000 Lehigh County, Pennsylvania, Industrial Development Authority
(Pennsylvania Power & Light Co. Project) Series A, MBIA,
6.40%, 11/1/21...................................................... 908,650
1,000,000 Matagorda County, Texas, Navigation District #1 (Houston
Lighting & Power) Series D, FGIC, 7.60%, 10/1/19.................... 1,072,490
Monroe County, Michigan (Detroit Edison Co.)
750,000 Series A, AMBAC, 9.625%, 12/1/15.................................... 805,065
1,000,000 Series I-B, MBIA, 6.55%, 9/1/24..................................... 905,940
1,500,000 Ohio State Air Quality Development Authority Rev. (Cleveland Co.
Project) FGIC, 8.00%, 12/1/13....................................... 1,659,780
200,000 Parish of West Feliciana, Louisiana (Gulf State Utilities) Series A,
7.50%, 5/1/15....................................................... 195,494
1,000,000 Pope County, Arkansas (Arkansas Power & Light Co. Project) FSA,
10.625%, 12/1/15.................................................... 1,072,820
1,000,000 Rockport, Indiana (Indiana & Michigan Electric Co.) Series A,
BIG, 9.25%, 8/1/14.................................................. 1,041,100
500,000 Warren County, New Jersey, Pollution Control Financing Authority,
Series A, FGIC, 9.00%, 12/1/06...................................... 550,920
------------
TOTAL POLLUTION CONTROL REVENUE..................................... 14,976,928
------------
PUBLIC IMPROVEMENT 0.5%
465,000 Dallas, Texas, Civic Center, Sr. Lien, AMBAC, 7.00%, 1/1/10............ 479,554
------------
SALES TAX REVENUE 2.4%
Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement,
FGIC
250,000 6.25%, 12/1/12...................................................... 235,597
500,000 6.25%, 12/1/17...................................................... 463,330
250,000 Broken Arrow, Oklahoma, Municipal Authority Utility System &
Sales Tax Rev., FGIC, 9.75%, 5/1/05................................. 262,620
1,000,000 Marion County, Indiana, Convention & Recreational Facilities,
Series A, AMBAC, 7.00%, 6/1/21...................................... 1,012,090
500,000 Rhode Island, Depositors Economic Corp., Special Obligation,
Series A, FSA, 6.625%, 8/1/19, Pre-refunded, 8/1/02................. 521,990
------------
TOTAL SALES TAX REVENUE............................................. 2,495,627
------------
TRANSPORTATION 6.3%
Chicago, Illinois, O'Hare International Airport, Special Facility Rev.
(International Terminal) Series A, MBIA
500,000 7.50%, 1/1/17....................................................... 505,135
500,000 7.625%, 1/1/10...................................................... 516,480
500,000 Harris County, Texas, Refunding, Toll Road Sr. Lien, Series B,
AMBAC, 6.625%, 8/15/17.............................................. 516,970
Hawaii State, Airports System Rev.
350,000 AMBAC, 7.375%, 7/1/11............................................... 356,052
500,000 2nd Series, MBIA, 7.00%, 7/1/18..................................... 498,810
1,250,000 Louisville & Jefferson County, Kentucky, Regional Airport Authority
Rev., Series A, MBIA, 8.50%, 7/1/17................................. 1,339,900
</TABLE>
D-4
<PAGE> 180
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION-CONTINUED
$ 500,000 Memphis-Shelby County, Tennessee, Airport Authority Rev., MBIA,
8.125%, 2/15/12 ......................................................... $ 536,490
1,700,000 Palm Beach County, Florida, Airport System Rev., MBIA,
7.75%, 10/01/10.......................................................... 1,829,710
500,000 Tulsa, Oklahoma, Airport Improvement, General Rev., MBIA,
7.50%, 6/1/08............................................................ 525,585
------------
TOTAL TRANSPORTATION...................................................... 6,625,132
------------
UTILITIES 16.4%
1,000,000 Austin, Texas, Utility Systems Rev., BIG, 8.625%, 11/15/12 ................. 1,149,170
1,000,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC,
6.30%, 1/1/12 ............................................................ 1,018,420
565,000 City of Brownsville, Texas, Utilities System Priority Rev., Series 1990,
AMBAC, 6.50%, 9/1/17 ..................................................... 539,790
1,000,000 Colorado River, Texas, Municipal Water District (Water
Transmission Facilities Project-A) AMBAC, 6.625%, 1/1/21 ................. 1,031,150
100,000 Farmington, New Mexico, Utility System Rev., FGIC,
9.75%, 5/15/13, Pre-refunded, 5/15/96 .................................... 108,458
2,000,000 Lower Colorado River Authority, Texas, Rev., Refunding, FSA,
5.625%, 1/1/17 ........................................................... 1,704,565
700,000 Missouri State Environmental Improvement & Energy Resource
Authority, Environment Improvement Rev., AMBAC,
7.40%, 5/1/20 ............................................................ 730,303
2,000,000 M-S-R Public Power Agency, California, San Juan Project Rev.,
Refunding, Series F, AMBAC, 6.00%, 7/1/20 ................................ 1,741,980
200,000 New York City, New York, Municipal Water Finance Authority,
Water & Sewer System Rev., Series A, 9.00%, 6/15/17,
Pre-refunded, 6/15/97 .................................................... 220,624
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev.,
MBIA, 5.75%, 1/1/20 ...................................................... 842,820
1,000,000 Northern Minnesota, Municipal Power Agency, Series A, AMBAC,
7.25%, 1/1/16 ............................................................ 1,039,670
215,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
Refunding, Series A, AMBAC, 9.25%, 1/1/19, Pre-refunded,
1/1/96 ................................................................... 230,639
500,000 Provo City, Utah, Energy System Rev., Series A, AMBAC,
9.50%, 11/1/10 ........................................................... 536,160
1,500,000 Reedy Creek, Florida, Improvement District Utilities Rev., Series 1,
MBIA, 9.00%, 10/1/07 ..................................................... 1,646,280
400,000 Rock Hill, South Carolina, Utility Systems Rev., FGIC,
8.00%, 1/1/18 ............................................................ 433,580
600,000 Tacoma, Washington, Electric Systems Rev., AMBAC,
8.00%, 1/1/11, Pre-refunded, 1/1/98 ...................................... 650,370
Washington State Public Power Supply System Rev. (Nuclear
Project No. 3)
450,000 BIG, 7.25%, 7/1/16 ....................................................... 482,841
2,000,000 MBIA, 5.60%, 7/1/15 ...................................................... 1,647,900
1,500,000 MBIA, 5.60%, 7/1/17 ...................................................... 1,218,330
250,000 Refunding, Rev., BIG, 6.00%, 7/1/18 ...................................... 213,170
------------
TOTAL UTILITIES........................................................... 17,186,220
------------
WASTE DISPOSAL 0.8%
1,000,000 Montgomery County, Maryland, Solid Waste System Rev., Series A,
AMBAC, 5.875%, 6/1/13 .................................................... 867,010
------------
TOTAL MUNICIPAL BONDS (Cost $105,401,512)................................. 101,304,692
------------
</TABLE>
D-5
<PAGE> 181
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 1.2%
$ 200,000 California Statewide Communities Development Corp. Rev., Series A,
3.60%, 8/1/19 ........................................................... $ 200,000
100,000 Dearborn, Michigan, Economic Development Corp. Rev. (Oakbrook
Project) 3.75%, 3/1/23 .................................................. 100,000
400,000 Panola County, Mississippi (Moog Automotive, Inc. Project),
3.75%, 9/1/10 ........................................................... 400,000
600,000 Tarrant County, Texas, Health Facilities Development Corp.,
3.80%, 9/1/18 ........................................................... 600,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $1,300,000) ....................................................... 1,300,000
------------
TOTAL INVESTMENTS (Cost $106,701,512) 97.8%................................ 102,604,692
Other assets and liabilities, net 2.2% .................................... 2,249,797
------------
NET ASSETS 100%........................................................... $104,854,489
============
</TABLE>
+ Interest rates are as of November 30, 1994
Rev.--Revenue bond
Insurers:
AMBAC--AMBAC Indemnity Corp.
BIG--Bond Investors Guaranty Insurance Corp.
CGIC--Capital Guaranty Insurance Corp.
CONN--Connie Lee
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investors' Assurance Corp.
See Notes to Financial Statements
D-6
<PAGE> 182
INSURED MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $106,701,512)................ $102,604,692
Interest receivable............................................. 2,431,085
Receivable for investments sold................................. 541,086
Receivable for Fund shares sold................................. 79,996
Other assets.................................................... 16,979
------------
105,673,838
------------
LIABILITIES
Payable for Fund shares redeemed................................ 364,842
Dividends payable............................................... 234,220
Due to Distributor.............................................. 68,938
Due to Adviser.................................................. 49,969
Bank overdraft.................................................. 47,535
Accrued expenses................................................ 45,995
Due to shareholder service agent................................ 7,850
------------
819,349
------------
NET ASSETS, equivalent to $10.55 per share for Class A and
Class B shares, and $10.54 per share for Class C shares....... $104,854,489
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 6,379,617 Class A and
3,379,577 Class B and 180,188 Class C shares outstanding...... $ 99,394
Capital surplus................................................. 114,706,725
Accumulated net realized loss on securities..................... (5,876,339)
Net unrealized depreciation of securities....................... (4,096,820)
Undistributed net investment income............................. 21,529
------------
NET ASSETS at November 30, 1994................................. $104,854,489
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
D-7
<PAGE> 183
INSURED MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................... $7,473,020
----------
EXPENSES
Management fees.............................................. 641,145
Service fees-Class A......................................... 180,174
Distribution and service fees-Class B........................ 378,659
Distribution and service fees-Class C........................ 15,952
Shareholder service agent's fees and expenses................ 118,640
Registration and filing fees................................. 92,838
Accounting services.......................................... 86,031
Reports to shareholders...................................... 28,650
Audit fees................................................... 22,702
Trustees' fees and expenses.................................. 11,975
Legal fees................................................... 11,762
Custodian fees............................................... 6,915
Miscellaneous................................................ 7,096
------------
Total expenses............................................. 1,602,539
------------
Net investment income...................................... 5,870,481
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.............................. (464,507)
Net unrealized depreciation of securities during the year.... (10,201,344)
------------
Net realized and unrealized loss on securities............. (10,665,851)
------------
Decrease in net assets resulting from operations...........$ (4,795,370)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
D-8
<PAGE> 184
INSURED MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------
1994 1993
------------ -------------
<S> <C> <C>
NET ASSETS, beginning of year............................... $109,719,511 $ 74,387,518
------------ -------------
OPERATIONS
Net investment income..................................... 5,870,481 5,137,222
Net realized loss on securities........................... (464,507) (228,375)
Net unrealized appreciation (depreciation) of securities
during the year......................................... (10,201,344) 2,393,531
------------ -------------
Increase (decrease) in net assets resulting
from operations........................................... (4,795,370) 7,302,378
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A................................................. (3,998,830) (4,006,512)
Class B................................................. (1,770,263) (1,129,616)
Class C................................................. (73,782) --
------------ -------------
(5,842,875) (5,136,128)
------------ -------------
In excess of net investment income
Class A................................................. -- (21,356)
Class B................................................. -- (9,946)
Class C................................................. -- --
------------ -------------
-- (31,302)
------------ -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS....................... (5,842,875) (5,167,430)
------------ -------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................. 11,790,509 17,447,835
Class B................................................. 10,898,379 25,351,509
Class C................................................. 2,707,049 --
------------ -------------
25,395,937 42,799,344
------------ -------------
Proceeds from shares issued for dividends reinvested
Class A................................................. 2,032,068 2,050,353
Class B................................................. 1,023,631 657,194
Class C................................................. 58,216 --
------------ -------------
3,113,915 2,707,547
------------ -------------
Cost of shares redeemed
Class A................................................. (14,932,364) (10,204,699)
Class B................................................. (7,093,131) (2,105,147)
Class C................................................. (711,134) --
------------ -------------
(22,736,629) (12,309,846)
------------ ------------
Increase in net assets resulting from share transactions.. 5,773,223 33,197,045
------------ ------------
INCREASE (DECREASE) IN NET ASSETS........................... (4,865,022) 35,331,993
------------ ------------
NET ASSETS, end of year..................................... $104,854,489 $109,719,511
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
D-9
<PAGE> 185
NOTES TO FINANCIAL STATEMENTS
Note 1-Significant Accounting Policies
American Capital Tax-Exempt Insured Municipal Portfolio (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as a
diversified open-end management investment company.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. Investment Valuations
Municipal bonds are valued at the most recently quoted bid prices or at
bid prices based on a matrix system (which considers such factors as
security prices, yields, maturities and ratings) furnished by dealers
and an independent pricing service. Securities for which market
quotations are not readily available are valued at a fair value as
determined in good faith by the Board of Directors of the Fund.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value.
Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days
to maturity becomes less than 61 days. From such time, until maturity,
the investments are valued at amortized cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal at maturity and interest.
The insurance reduces credit risk but not market risk of the security.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which a Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised by Van Kampen American Capital Asset
Manager, Inc. ("The Adviser"), the daily aggregate of which is invested
in repurchase agreements. Repurchase agreements are collateralized by
the underlying debt securities. The Fund will make payment for such
securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
C. Futures Contracts
Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments by increasing or decreasing
the percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is
held as collateral in an account in the name of the broker, the Fund's
agent in acquiring the futures position. During the period the futures
contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains and losses are realized. The cost
of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.
D-10
<PAGE> 186
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as "regulated investment companies" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards, if any, expire or are offset by
net realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
F. Dividends and Distributions
The Fund declares dividends from net investment income on each business
day. The Fund intends to continue to invest principally in tax-exempt
obligations sufficient in amount to qualify it to pay "exempt-interest
dividends" as defined in the Internal Revenue Code.
The Fund distributes tax basis earnings in accordance with the minimum
distribution requirements of the Internal Revenue Code, which may differ
from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Debt Discount or Premium
The Fund accounts for discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue debt
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains
for book purposes and ordinary income for tax purposes.
H. When-Issued Securities
Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the day of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligations, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.
Note 2-Management Fees and Other Transactions with Affiliates
The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the aggregate average daily net assets of the Fund at an
annual rate of .60% of the first $300 million of the aggregate average daily
net assets, .55% of the next $300 million, and .50% of the amount in excess of
$600 million. From time to time, the Adviser may voluntarily elect to
subsidize a portion of the Fund's expenses. The voluntary subsidy may be
discontinued at any time without prior notice. There were no subsidies during
the fiscal year ended November 30, 1994.
Other transactions with affiliates during the year were as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounting services (accounting officers cost).. $ 7,296
Legal fees...................................... 10,864
Shareholder service agent's fees................ 92,670
Sales of Fund shares:
Distributor commissions....................... 27,152
Retail Dealer commissions..................... 8,526
</TABLE>
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
These charges included the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services. These services provided by the
Adviser are at cost.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.
D-11
<PAGE> 187
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.
The Fund was informed that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corporation (the "Retail Dealer"),
both affiliates of the Adviser, received commissions charged on sales of Fund
shares during the year.
Under the terms of the Distribution plans, the Fund pays up to .25% per
annum of its average daily net assets to reimburse the Distributor for
expenses and service fees incurred. Class B and Class C shares pay an
additional distribution fee of up to .75% per annum of their average net
assets to reimburse the Distributor for its distribution expenses. Actual
distribution expenses incurred by the Distributor for Class B and Class C
shares may exceed the amounts reimbursed to the Distributor by the Fund.
At November 30, 1994, the unreimbursed expenses by the Distributor under the
Class B and Class C plans aggregated approximately $1.5 million and $36,000,
respectively, and may be carried forward and reimbursed through either the
collection of the contingent deferred sales charges from share redemptions or,
subject to the annual renewal of the plans, future reimbursements of
distribution fees.
Certain officers and trustees of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.
NOTE 3-INVESTMENT ACTIVITY
During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments were:
<TABLE>
<CAPTION>
<S> <C>
Purchases............................... $16,297,871
Sales................................... 5,427,250
</TABLE>
The following table presents the identified cost of investments at November
30, 1994 for the federal income tax purposes with the associated net
unrealized depreciation and the net realized capital loss carryforward.
<TABLE>
<CAPTION>
<S> <C>
Identified cost......................... $106,701,512
============
Gross unrealized appreciation........... $ 2,150,516
Gross unrealized depreciation........... (6,247,336)
------------
Net unrealized depreciation............. $ (4,096,820)
============
Net realized capital loss carryforward . $ 5,876,339
============
</TABLE>
The net realized capital loss carryforwards at November 30, 1994 may be
utilized to offset any future capital gains until expiration from 1995
through 2002.
During the year, the cost of purchases and proceeds from sales of investments
resulting from transactions between the Fund and other investment advised by
the Adviser were:
<TABLE>
<CAPTION>
<S> <C>
Purchases................................ $1,240,000
Sales.................................... 6,185,000
</TABLE>
Such transactions were at current market prices on the dates of the
transactions for cash payment against prompt delivery, with no brokerage
commissions. The sales transactions did not result in a net realized gain or
loss to the Fund.
D-12
<PAGE> 188
Note 4-Trustee Compensation
Trustee fees for the year and the liability for deferred compensation at
November 30, 1994 were:
<TABLE>
<CAPTION>
<S> <C>
Trustee fees.............................. $10,514
Deferred compensation liability........... 7,238
</TABLE>
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $2,510 plus a fee of $65 per day for the Board and Committee
meetings attended. The Chairman receives additional fees at an annual rate of
$940. The trustees may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the general accounts. Funds for the payment of obligations
under the Plan will not be reserved or set aside by any form of trust or
escrow. Each director covered by the Plan has elected to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
Note 5-Capital
The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time
of purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of a higher distribution services fee and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each class
of shares based upon the relative proportion of net assets of each class. Class
B shares and Class C shares automatically convert to Class A shares six years
and ten years after purchase, respectively, subject to certain conditions.
The Fund has an unlimited number of $.01 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Year Ended November 30
------------------------
1994 1993
---------- ----------
<S> <C> <C>
Shares sold
Class A.............................. 1,040,502 1,513,883
Class B.............................. 959,397 2,200,973
Class C.............................. 240,049 --
---------- ----------
2,239,948 3,714,856
---------- ----------
Shares issued for dividends reinvested
Class A.............................. 182,323 177,668
Class B.............................. 91,999 56,831
Class C.............................. 5,302 --
---------- ----------
279,624 234,499
---------- ----------
Shares redeemed
Class A.............................. (1,344,232) (882,537)
Class B.............................. (640,367) (181,615)
Class C.............................. (65,163) --
---------- ----------
(2,049,762) (1,064,152)
---------- ----------
Increase in shares outstanding......... 469,810 2,885,203
========== ==========
</TABLE>
D-13
<PAGE> 189
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED NOVEMBER 30
------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.... $11.59 $11.30 $11.07 $10.86 $10.95
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .74 .790 .810 .86 .84
Expenses.............................. (.13) (.127) (.135) (.13) (.12)
------ ------ ------ ------ ------
Net investment income................. .61 .663 .675 .73 .72
Net realized and unrealized gain or
loss on securities................... (1.0425) .274 .240 .19 (.07)
-------- ------- ------- ------ ------
Total from investment operations...... (.4325) .937 .915 .92 .65
-------- ------- ------- ------ ------
DIVIDENDS FROM NET INVESTMENT INCOME.. (.6075) (.647) (.685) (.71) (.74)
-------- ------- ------- ------ ------
Net asset value, end of year.......... $10.55 $11.59 $11.30 $11.07 $10.86
======= ======= ======= ====== ======
TOTAL RETURN(1)....................... (3.88%) 8.47% 8.48% 8.73% 6.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions).... $67.3 $75.3 $64.3 $52.2 $42.3
Average net assets (millions)......... $73.6 $72.0 $57.8 $48.6 $39.3
Ratios to average net assets(2)
Expenses............................. 1.15% 1.07% 1.20% 1.20% 1.08%
Expenses, without expense
reimbursement ...................... -- 1.17% -- -- 1.20%
Net investment income................ 5.45% 5.57% 5.98% 6.59% 6.63%
Net investment income, without
expense reimbursement............... -- 5.47% -- -- 6.51%
Portfolio turnover rate............... 5% 5% 3% 5% 1%
</TABLE>
(1) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(2) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
D-14
<PAGE> 190
FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- ------------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
------------------------ NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year......... $11.58 $11.30 $11.39 $11.66
-------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .74 .754 .28 .77
Expenses................................... (.21) (.205) (.08) (.22)
-------- ------- ------ -------
Net investment income...................... .53 .549 .20 .55
Net realized and unrealized gain or
loss on securities....................... (1.0365) .294 (.07) (1.161)
-------- ------- ------ -------
Total from investment operations........... (.5065) .843 .13 (.611)
-------- ------- ------ -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.5235) (.563) (.22) (.509)
-------- ------- ------ -------
Net asset value, end of year............... $10.55 $11.58 $11.30 $10.54
======== ======= ======= =======
TOTAL RETURN(3)............................ (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)......... $35.6 $34.4 $10.1 $ 1.9
Average net assets (millions).............. $37.9 $23.8 $ 5.2 $ 1.6
Ratios to average net assets(4)
Expenses................................. 1.91% 1.77% 1.82%(5) 1.89%(5)
Expenses, without expense reimbursement.. -- 1.87% -- --
Net investment income.................... 4.71% 4.74% 4.33%(5) 4.64%(5)
Net investment income, without
expense reimbursement.................. -- 4.64% -- --
Portfolio turnover rate.................... 5% 5% 3% 5%
</TABLE>
(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) See Note 2.
(5) Annualized
See Notes to Financial Statements.
D-15
<PAGE> 191
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of American Capital Tax-Exempt
Insured Municipal Portfolio
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio and the related statement of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Tax-Exempt
Insured Municipal Portfolio (the "Fund") at November 30, 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 selected per share data and
ratios for each of the periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
reponsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at November 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinon expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
January 16, 1995
D-16
<PAGE> 192
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
The VKAC Tax Free Fund's trustees and officers are covered by an Errors and
Omissions Policy. Section 5 of the current and proposed investment advisory
agreement between each series of the VKAC Tax Free Fund and VK 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 VK Adviser, VK Adviser shall not be liable to the VKAC
Tax Free Fund 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 VKAC Tax Free Fund shall indemnify Van Kampen
American Capital Distributors, Inc. 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,
registration statements or prospectuses except to the extent the misstated fact
or omission was made in reliance upon information provided by or on behalf of
Van Kampen American Capital Distributors, Inc.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the VKAC Tax Free Fund and VK Adviser and
Van Kampen American Capital Distributors, Inc. pursuant to the foregoing
provisions or otherwise, the VKAC Tax Free Fund has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the VKAC
Tax Free Fund of expenses incurred or paid by a trustee, director, officer, or
controlling person of the VKAC Tax Free Fund and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted against the VKAC Tax Free Fund by such trustee, director, officer or
controlling person or Van Kampen American Capital Distributors, Inc. in
connection with the Class A, B and C shares, respectively, being registered, the
VKAC Tax Free Fund 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 Securities Act and will be governed by the final
adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
(1) -- (a) Agreement and Declaration of Trust+
-- (b) Form of Establishment and Designation of Series for Van Kampen American Capital
Municipal Income Fund+
(2) -- Bylaws+
(4) -- Form of Agreement and Plan of Reorganization*
-- (a) Agreement and Plan of Reorganization for the Van Kampen Merritt Municipal Income
Fund and the American Capital Municipal Bond Fund*
-- (b) Agreement and Plan of Reorganization for the Van Kampen Merritt Insured Tax Free
Income Fund and the American Capital Insured Municipal Portfolio*
(5) -- Specimen Stock Certificate for Class A, B and C Shares of the Van Kampen American
Capital Municipal Income Fund+
(6) -- Form of Investment Advisory Agreement+
(7) -- (a) Form of Distribution and Service Agreement+
-- (b) Form of Dealer Agreement+
-- (c) Form of Broker Agreement+
-- (d) Form of Bank Agreement+
-- (e) Form of Underwriting Agreement+
-- (f) Form of Selected Dealer Agreement+
-- (g) Form of Agreement Between Underwriters+
(9) -- Form of Custodian Agreement+
-- (b) Form of Transfer Agency Agreement+
</TABLE>
C-1
<PAGE> 193
<TABLE>
<S> <C>
(10) -- (a) Form of Distribution Plan Pursuant to Rule 12b-1+
-- (b) Form of Shareholder Assistance Agreement+
-- (c) Form of Administrative Services Agreement+
-- (d) Form of Service Plan+
(11) -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom+
(12) -- Form of Opinion of O'Melveny & Myers+
(13) -- (a) Form of Support Service Agreement+
-- (b) Fund Pricing Agreement+
-- (c) Form of Amended Accounting Service Agreement+
-- (d) Form of Amended Legal Services Agreement+
(14) -- (a) Consent of Price Waterhouse LLP*
-- (b) Consent of KPMG Peat Marwick LLP*
(16) -- Powers of Attorney*
(17) -- (a) Copy of 24f-2 Election of Registrant+
-- (b) Form of proxy card for Van Kampen American Capital Municipal Bond Fund*
-- (c) Form of proxy card for Van Kampen American Capital Insured Portfolio*
(27) -- (a) Financial Data Schedule for Van Kampen American Capital Municipal Income Fund*
-- (b) Financial Data Schedule for Van Kampen American Capital Municipal Bond Fund*
-- (c) Financial Data Schedule for Van Kampen American Capital Insured Tax Free Income
Fund*
-- (d) Financial Data Schedule for Van Kampen American Capital Insured Portfolio*
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by pre-effective amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
C-2
<PAGE> 194
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED ON BEHALF OF THE REGISTRANT IN THE CITY OF OAKBROOK TERRACE AND
STATE OF ILLINOIS, ON THE 23RD DAY OF MAY, 1995.
VAN KAMPEN AMERICAN CAPITAL
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
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
Chairman of the Board and Trustee
- ---------------------------------------------
[ ]
/s/ DENNIS J. MCDONNELL* President and Trustee
- --------------------------------------------- (Chief Executive Officer)
Dennis J. McDonnell
/s/ EDWARD C. WOOD, III* Vice President, Treasurer and Chief Financial
- --------------------------------------------- Officer (Accounting Officer)
Edward C. Wood, III
/s/ R. CRAIG KENNEDY* Trustee
- ---------------------------------------------
R. Craig Kennedy
/s/ PHILLIP P. GAUGHAN* Trustee
- ---------------------------------------------
Phillip P. Gaughan
/s/ DONALD C. MILLER* Trustee
- ---------------------------------------------
Donald C. Miller
/s/ JACK E. NELSON* Trustee
- ---------------------------------------------
Jack E. Nelson
/s/ JEROME L. ROBINSON* Trustee
- ---------------------------------------------
Jerome L. Robinson
/s/ WAYNE W. WHALEN * Trustee
- ---------------------------------------------
Wayne W. Whalen
</TABLE>
- ---------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney, a copy of which
previously was filed.
<TABLE>
<C> <S> <C>
/s/ RONALD A. NYBERG
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-fact
</TABLE>
C-3
<PAGE> 195
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN AMERICAN CAPITAL TAX FREE FUND
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<S> <C> <C>
(1) -- (a) Agreement and Declaration of Trust+
-- (b) Form of Establishment and Designation of Series for Van Kampen American
Capital Municipal Income Fund+
(2) -- Bylaws+
(4) -- Form of Agreement and Plan of Reorganization*
-- (a) Agreement and Plan of Reorganization for the Van Kampen Merritt Municipal
Income Fund and the American Capital Municipal Bond Trust*
-- (b) Agreement and Plan of Reorganization for the Van Kampen Merritt Insured
Tax Free Income Fund and the American Capital Municipal Portfolio*
(5) -- Specimen Stock Certificate for Class A, B and C Shares of the Van Kampen
American Capital Municipal Income Fund+
(6) -- Form of Investment Advisory Agreement+
(7) -- (a) Form of Distribution and Service Agreement+
-- (b) Form of Dealer Agreement+
-- (c) Form of Broker Agreement+
-- (d) Form of Bank Agreement+
-- (e) Form of Underwriting Agreement+
-- (f) Form of Selected Dealer Agreement+
-- (g) Form of Agreement Between Underwriters+
(9) -- Form of Custodian Agreement+
-- (b) Form of Transfer Agency Agreement+
(10) -- (a) Form of Distribution Plan Pursuant to Rule 12b-1+
-- (b) Form of Shareholder Assistance Agreement+
-- (c) Form of Administrative Services Agreement+
-- (d) Form of Service Plan+
(11) -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom+
(12) -- Form of Opinion of O'Melveny & Myers+
(13) -- (a) Form of Support Service Agreement+
-- (b) Fund Pricing Agreement+
-- (c) Form of Amended Accounting Service Agreement+
-- (d) Form of Amended Legal Services Agreement+
(14) -- (a) Consent of Price Waterhouse LLP*
-- (b) Consent of KPMG Peat Marwick LLP*
(16) -- Powers of Attorney*
(17) -- (a) Copy of 24f-2 Election of Registrant+
-- (b) Form of proxy card for Van Kampen American Capital Municipal Bond Fund*
-- (c) Form of proxy card for Van Kampen American Capital Insured Portfolio*
(27) -- (a) Financial Data Schedule for Van Kampen American Capital Municipal Income
Fund*
-- (b) Financial Data Schedule for Van Kampen American Capital Municipal Bond
Fund*
-- (c) Financial Data Schedule for Van Kampen American Capital Insured Tax Free
Income Fund*
-- (d) Financial Data Schedule for Van Kampen American Capital Insured Portfolio*
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by pre-effective amendment.
<PAGE> 1
EXHIBIT 4(a)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
July , 1995, by and between the Van Kampen Merritt Tax Free Fund, a Delaware
business trust formed under the laws of the State of Delaware (the "VKM Trust")
on behalf of its series, the Van Kampen Merritt Municipal Income Fund (the "VKM
Fund") and the American Capital Municipal Bond Trust, a business trust formed
under the laws of the State of Delaware (the "AC Fund").
W I T N E S S E T H :
WHEREAS, on December 20, 1994, (the "Acquisition Date") The Van Kampen
Merritt Companies, Inc. ("TVKMC") acquired all of the issued and outstanding
shares of American Capital Management & Research, Inc. ("American Capital") and
subsequently changed its name to Van Kampen American Capital, Inc.;
WHEREAS, American Capital and TVKMC, through their affiliated companies,
sponsor and manage a number of registered investment companies; and
WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;
WHEREAS, the AC Fund was organized as a corporation under the laws of Texas
on September 7, 1976, and subsequently reincorporated under the laws of the
State of Maryland on July 2, 1992 and further, reorganized as a Delaware
business trust, pursuant to an Agreement and Declaration of Trust dated [July
, 1995], and is authorized to issue an unlimited number of shares of
beneficial interest with par value equal to $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly, Van
Kampen American Capital Asset Management, Inc.) ("VKAC Asset Management")
provides investment advisory and administrative services to the AC Fund;
WHEREAS, the VKM Trust was organized as a Massachusetts business trust, and
subsequently reorganized as a Delaware business trust pursuant to an Agreement
and Declaration of Trust (the "Declaration of Trust") dated [July , 1995] ,
pursuant to which it is authorized to issue an unlimited number of shares of
beneficial interest without par value, which at present have been divided into
different series, each series constituting a separate and distinct series of the
VKM Trust, including the VKM Fund;
WHEREAS, Van Kampen American Capital Investment Advisory Corp. (formerly,
Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.") provides
investment advisory and administrative services to the VKM Fund;
WHEREAS, the Board of Trustees of the VKM Trust and the AC Fund have
determined that entering into this Agreement for the VKM Trust to acquire the
assets and liabilities of the AC Fund is in the best interests of the
shareholders of each respective fund; and
WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the AC Fund will convey, transfer and deliver
to the VKM Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the AC Fund (including accrued interest to the Closing Date)
consisting of nondefaulted, liquid, tax-exempt municipal securities at least 80%
of which shall be rated investment grade by Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service ("Moody's"), due bills, cash and other
marketable securities acceptable to the VKM Fund as more fully set forth on
Schedule 1 hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets").
B. CONSIDERATION. In consideration thereof, the VKM Trust agrees that on
the Closing Date the VKM Trust will (i) deliver to the AC Fund, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the
1
<PAGE> 2
VKM Fund having net asset values per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets net of
the Liabilities determined pursuant to Section 3A of this Agreement
(collectively, the "VKM Fund Shares") and (ii) assume all of the AC Fund's
liabilities described in Section 3E hereof (the "Liabilities"). All VKM Fund
Shares delivered to the AC Fund in exchange for such Assets shall be delivered
at net asset value without sales load, commission or other transactional fee
being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the AC Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VKM Trust shall deliver to the AC Fund the VKM Fund
Shares in proportion and amounts equal to the total net asset values represented
by the Class A, Class B and Class C Shares then outstanding in the AC Fund and
the AC Fund thereafter shall, in order to effect the distribution of such shares
to the AC Fund stockholders, instruct the VKM Trust to register the pro rata
interest in the VKM Fund Shares (in full and fractional shares) of each of the
holders of record of shares of the AC Fund in accordance with their holdings of
either Class A, Class B or Class C Shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses and
taxpayer identification numbers), and the VKM Trust agrees promptly to comply
with said instruction. The VKM Trust shall have no obligation to inquire as to
the validity, propriety or correctness of such instruction, but shall assume
that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the AC Fund to be
transferred and assumed, respectively, by the VKM Fund shall be computed as of
the Closing Date, in the manner set forth in the most recent Prospectus and
Statement of Additional Information of the VKM Fund (collectively, the "VKM
Trust Prospectus"), copies of which have been delivered to the AC Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the VKM Fund (the "Custodian") for
the benefit of the VKM Fund, duly endorsed in proper form for transfer in such
condition as to constitute a good delivery thereof, free and clear of all liens,
encumbrances and claims whatsoever, in accordance with the custom of brokers,
and shall be accompanied by all necessary state stock transfer stamps, the cost
of which shall be borne by the AC Fund.
C. FAILURE TO DELIVER SECURITIES. If the AC Fund is unable to make delivery
pursuant to Section 3B hereof to the Custodian of any of the AC Fund's
securities for the reason that any of such securities purchased by the VKM Trust
have not yet been delivered to it by the AC Fund's broker or brokers, then, in
lieu of such delivery, the AC Fund shall deliver to the Custodian, with respect
to said securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other documents
as may be required by the VKM Trust or Custodian, including brokers'
confirmation slips.
D. SHAREHOLDER ACCOUNTS. The VKM Trust, in order to assist the AC Fund in
the distribution of the VKM Fund Shares to the AC Fund shareholders after
delivery of the VKM Fund Shares to the AC Fund, will establish pursuant to the
request of the AC Fund an open account with the VKM Fund for each shareholder of
the AC Fund and, upon request by the AC Fund, shall transfer to such account the
exact number of full and fractional Class A, Class B and Class C shares of the
VKM Fund then held by the AC Fund specified in the instruction provided pursuant
to Section 2 hereof. The VKM Fund is not required to issue certificates
representing VKM Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the AC Fund, certificates representing shares of
stock of the AC Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of AC Fund's liabilities,
debts, obligations, and duties of whatever kind or nature, whether absolute,
accrued, contingent, or otherwise, whether or not arising in the ordinary course
of business, whether or not determinable at the Closing Date, and whether or not
specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated the VKM Trust agrees to pay (i) for the reasonable outside expenses
for the transactions contemplated herein; including, but not by way of
2
<PAGE> 3
limitation, the preparation of the VKM Trust's Registration Statement on Form
N-14 (the "Registration Statement") and the solicitation of the AC Fund
shareholder proxies; (ii) AC Fund's counsel's reasonable attorney's fees, which
fees shall be payable pursuant to receipt of an itemized statement; and (iii)
the cost of rendering the tax opinion, more fully referenced in Section 7F
below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to the
date of termination of this Agreement shall be borne by Advisory Corp.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the AC Fund shall voluntarily
dissolve and completely liquidate by taking, in accordance with the Delaware
Business Trust Law and Federal securities laws, all steps as shall be necessary
and proper to effect a complete liquidation and dissolution of the AC Fund.
Immediately after the Closing Date, the stock transfer books relating to the AC
Fund shall be closed and no transfer of shares shall thereafter be made on such
books.
4. AC FUND'S REPRESENTATIONS AND WARRANTIES.
The AC Fund, hereby represents and warrants to the VKM Trust and agrees
with the VKM Trust, which representations and warranties are true and correct on
the date hereof, that:
A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and is duly authorized
to transact business in the State of Delaware. The AC Fund is qualified to do
business in all jurisdictions in which it is required to be so qualified, except
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the AC Fund. The AC Fund has all material federal, state and
local authorization necessary to own all of the properties and assets and to
carry on its business as now being conducted, except authorizations which the
failure to so obtain would not have a material adverse effect on the AC Fund.
B. REGISTRATION. The AC Fund is registered under the Investment Company Act
of 1940 (the "1940 Act") as an open-end, diversified management company and such
registration has not been revoked or rescinded. The AC Fund is in compliance in
all material respects with the 1940 Act and the rules and regulations thereunder
with respect to its activities. All of the outstanding shares of the AC Fund
have been duly authorized and are validly issued, fully paid and non-assessable
and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the AC Fund audited as of and for the year ended
September 30, 1994, true and complete copies of which have been heretofore
furnished to the VKM Trust, fairly represent the financial condition and the
results of operations of the AC Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust (i) an
unaudited statement of assets and liabilities and the portfolio of investments
and the related statements of operations and changes in net assets of the AC
Fund for the period ended June 30 , 1995; and (ii) within five (5) business days
after the Closing Date, an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and changes in
net assets as of and for the interim period ending on the Closing Date; such
financial statements will represent fairly the financial position and portfolio
of investments and the results of the AC Fund's operations as of, and for the
period ending on, the dates of such statements in conformity with generally
accepted accounting principles applied on a consistent basis during the periods
involved and the results of its operations and changes in financial position for
the periods then ended; and such financial statements shall be certified by the
Treasurer of the AC Fund as complying with the requirements hereof.
E. LIABILITIES. There are, and as of the Closing Date will be, no
contingent liabilities of the AC Fund not disclosed in the financial statements
delivered pursuant to Sections 4C and 4D which would materially affect the AC
Fund's financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the AC Fund which
would, if adversely determined, materially affect the AC Fund's financial
condition. All Liabilities were incurred by the AC Fund in the ordinary course
of its business.
F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the AC
Fund's
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Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the AC Fund to which the AC Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, Price Waterhouse, auditors
for the AC Fund, shall furnish the VKM Fund with a statement of the earnings and
profits of the AC Fund within the meaning of the Code as of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of
the AC Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of 1933,
(the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other tax returns and reports of the AC Fund required by law to have been
filed by such dates shall have been filed, and all Federal and other taxes shown
thereon shall have been paid so far as due, or provision shall have been made
for the payment thereof, and to the best of the AC Fund's knowledge no such
return is currently under audit and no assessment has been asserted with respect
to any such return.
J. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter into
this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the AC Fund's
Board of Trustees, and except for obtaining approval of the holders of the
shares of the AC Fund, no other corporate acts or proceedings by the AC Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the AC Fund and
constitutes a legal, valid and binding obligation of AC Fund enforceable in
accordance with its terms.
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Fund does not and will not (i) violate
any provision of the Declaration of Trust or amendment thereof of the AC Fund,
(ii) violate any statute, law, judgment, writ, decree, order, regulation or rule
of any court or governmental authority applicable to the AC Fund, (iii) result
in a violation or breach of, or constitute a default under any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the AC Fund is subject, or (iv) result in the creation or
imposition or any lien, charge or encumbrance upon any property or assets of the
AC Fund. Except as set forth in Schedule 2 to this Agreement, (i) no consent,
approval, authorization, order or filing with or notice to any court or
governmental authority or agency is required for the consummation by the AC Fund
of the transactions contemplated by this Agreement and (ii) no consent of or
notice to any third party or entity is required for the consummation by the AC
Fund of the transactions contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the AC
Fund, other than changes in the ordinary course of its business, or any
pending or threatened litigation, which has had or may have an adverse
material effect on such business, results of operations, assets or
financial condition;
(2) issued any option to purchase or other right to acquire shares of
the AC Fund granted by the AC Fund to any person other than subscriptions
to purchase shares at net asset value in accordance with terms in the
prospectus for the AC Fund;
(3) any entering into, amendment or termination of any contract or
agreement by AC Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the AC Fund for borrowed money or any commitment to borrow
money entered into by the AC Fund;
(5) any amendment of the Certificate of Incorporation of the AC Trust
or Declaration of Sub-Trust of the AC Fund; or
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<PAGE> 5
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the AC Fund other than a lien
for taxes not yet due and payable.
M. TITLE. On the Closing Date, the AC Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and delivery such Assets; upon delivery of such Assets, the VKM
Fund will receive good and marketable title to such Assets, free and clear of
all liens, mortgages, pledges, encumbrances, charges, claims and equities other
than a lien for taxes not yet due and payable.
N. PROXY STATEMENT. The AC Fund's Proxy Statement, at the time of delivery
by the AC Fund to its shareholders in connection with a special meeting of
shareholders to approve this transaction, and the AC Fund's Prospectus and
Statement of Additional Information with respect to the AC Fund on the forms
incorporated by reference into such Proxy Statement and as of their respective
dates (collectively, the "AC Fund's Proxy Statement/Prospectus"), and at the
time the Registration Statement becomes effective, the Registration Statement
insofar as it relates to the AC Fund and at all times subsequent thereto and
including the Closing Date, as amended or as supplemented if it shall have been
amended or supplemented, conform and will conform, in all material respects, to
the applicable requirements of the applicable Federal and state securities laws
and the rules and regulations of the SEC thereunder, and do not and will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, except
that no representations or warranties in this Section 4N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the VKM Trust, VKM Fund or their affiliates furnished to the AC Fund
by the VKM Trust.
O. BROKERS. There are no brokers or finders fees payable by the AC Fund in
connection with the transactions provided for herein.
P. TAX QUALIFICATION. The AC Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the VKM Fund
and those to which the Assets are subject.
5. THE VKM TRUST'S REPRESENTATIONS AND WARRANTIES.
The VKM Trust, on behalf of the VKM Fund, hereby represents and warrants to
the AC Fund and agrees with the AC Fund, which representations and warranties
are true and correct on the date hereof, that:
A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly formed
and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and VKM Fund
are qualified to do business in all jurisdictions in which they are required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on either the VKM Trust or VKM Fund. The VKM
Trust has all material federal, state and local authorization necessary to own
on behalf of the VKM Trust all of the properties and assets allocated to the VKM
Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have a
material adverse effect on the VKM Trust or VKM Fund.
B. REGISTRATION. The VKM Fund is registered under the 1940 Act as an
open-end, diversified management company and; such registration has not been
revoked or rescinded. The VKM Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest of the VKM Fund (subject to the
matters set forth in the Opinion of Counsel dated , from
Skadden, Arps, Slate, Meagher & Flom, to the VKM Trust, a copy of which is
contained in the VKM Trust's registration statement on Form N1-A, a copy of
which opinion letter has been tendered to the AC Fund) have been duly authorized
and are validly issued, fully paid and non-assessable and not subject to
pre-emptive dissenters rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the VKM Fund audited as of and for the year ended
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<PAGE> 6
December 31, 1994, true and complete copies of which have been heretofore
furnished to the AC Fund fairly represent the financial condition and the
results of operations of the VKM Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund (i) an
unaudited statement of assets and liabilities and the portfolio of investments
and the related statements of operations and changes in net assets of the VKM
Fund for the period ended March 31, 1995, and (ii) within five (5) business days
after the Closing Date, an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and changes in
net assets as of and for the interim period ending on the Closing Date; such
financial statements will represent fairly the financial position and portfolio
of investments of the VKM Fund and the results of its operations as of, and for
the period ending on, the dates of such statements in conformity with generally
accepted accounting principles applied on a consistent basis during the period
involved and fairly present the financial position of the VKM Fund as at the
dates thereof and the results of its operations and changes in financial
position for the periods then ended; and such financial statements shall be
certified by the Treasurer of the VKM Trust as complying with the requirements
hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the VKM
Fund not disclosed in the financial statements delivered pursuant to Sections 5C
and 5D and there are no legal, administrative, or other proceedings pending or,
to its knowledge, threatened against the VKM Fund which would, if adversely
determined, materially affect the VKM Fund's financial condition.
F. MATERIAL AGREEMENTS. The VKM Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the VKM
Fund's Prospectus and Statement of Additional Information, disclosed on Schedule
4 hereto, there are no material agreements outstanding to which the VKM Fund is
a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other tax returns and reports of the VKM Fund required by laws to have been
filed by such dates shall have been filed, and all Federal and other taxes shall
have been paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the VKM Fund's knowledge no such return is currently
under audit and no assessment has been asserted with respect to any such return.
H. CORPORATE AUTHORITY. The VKM Trust has the necessary power under its
Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by the VKM Trust's Board of Trustees, no other corporate
acts or proceedings by the VKM Trust or VKM Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the VKM Trust and constitutes a valid and binding
obligation of the VKM Trust enforceable in accordance with its terms.
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i) result
in a material violation of any provision of the Declaration of Trust of the VKM
Trust or the Designation of Series of the VKM Fund, (ii) result in a material
violation of any statute, law, judgment, writ, decree, order, regulation or rule
of any court or governmental authority applicable to the VKM Trust or (iii)
result in a material violation or breach of, or constitute a default under, or
result in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the VKM Trust pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the VKM Trust is subject. Except as set forth in Schedule 6
to this Agreement, (i) no consent, approval, authorization, order of filing with
notice to any court or governmental authority or agency is required for the
consummation by the VKM Trust of the transactions contemplated by this Agreement
and (ii) no consent of or notice to any third party or entity is required for
the consummation by the VKM Trust of the transactions contemplated by this
Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the VKM Fund which
would materially affect its financial condition.
K. SHARES OF THE VKM FUND: REGISTRATION. The VKM Fund Shares to be issued
pursuant to Section 1 hereof will be duly registered under the Securities Act
and all applicable state securities laws.
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<PAGE> 7
L. SHARES OF THE VKM FUND: AUTHORIZATION. Subject to the matters set forth
in the Statement of Additional Information of the VKM Fund, under the heading
"The Fund and the Trust", a copy of which has been furnished to the AC Fund, the
shares of beneficial interest of the VKM Fund to be issued pursuant to Section 1
hereof have been duly authorized and, when issued in accordance with this
Agreement, will be validly issued and fully paid and non-assessable by the VKM
Trust and conform in all material respects to the description thereof contained
in the VKM Trust's Prospectus furnished to the AC Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
VKM Fund, other than changes in the ordinary course of its business, which has
had an adverse material effect on such business, results of operations, assets
or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein filed on Form N-14, (the "Registration Statement"), as of the
effective date of the Registration Statement, and at all times subseq uent
thereto and including the Closing Date, as amended or as supplemented if they
shall have been amended or supplemented, will conform, in all material respects,
to the applicable requirements of the applicable Federal securities laws and the
rules and regulations of the SEC thereunder, and will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representations or warranties in this Section 5N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the AC Fund furnished to the VKM Trust by the AC Fund.
O. TAX QUALIFICATION. The VKM Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years. For purposes of this Section, any
reference to the VKM Fund shall include its predecessors, a sub-trust of a
Massachusetts business trust organized and designated on [August 13, 1985] and
subsequently reorganized by merger with and into the VKM Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the AC Fund and VKM Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The AC Fund shall operate only in the ordinary course of
business consistent with prior practice. No party shall take any action that
would, or reasonably would be expected to, result in any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect.
B. GOVERNMENT FILINGS; CONSENTS. The AC Fund and VKM Trust shall file all
reports required to be filed by the AC Fund and VKM Trust with the SEC between
the date of this Agreement the Closing Date and shall deliver to the other party
copies of all such reports promptly after the same are filed. Except where
prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the AC Fund
and the VKM Trust shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the AC
Fund's Proxy Statement/Prospectus, each party hereto will cooperate with the
other and furnish to the other the information relating to the AC Fund, VKM
Trust or VKM Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to be
set forth in the Registration Statement or the Proxy Statement/Prospectus, as
the case may be. The AC Fund shall promptly prepare and file with the SEC the
Proxy Statement/Prospectus and the VKM Trust shall promptly prepare and file
with the SEC the Registration Statement, in which the Proxy Statement/Prospectus
will be included as a prospectus. In connection with the Registration Statement,
insofar as it relates to the AC Fund and its affiliated persons, VKM Trust shall
only include such information as is approved by the AC Fund for use in the
Registration Statement. The VKM Trust shall not amend or supplement any such
information regarding the VKM Trust and such affiliates without the prior
written consent of the AC Fund which consent shall not be unreasonably withheld.
The VKM Trust shall promptly notify and provide the AC Fund with copies of all
amendments or
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<PAGE> 8
supplements filed with respect to the Registration Statement. The VKM Trust
shall use all reasonable efforts to have the Registration Statement declared
effective under the Securities Act as promptly as practicable after such filing.
The VKM Trust shall also take any action (other than qualifying to do business
in any jurisdiction in which it is now not so qualified) required to be taken
under any applicable state securities laws in connection with the issuance of
the VKM Trust's shares of beneficial interest in the transactions contemplated
by this Agreement, and the AC Fund shall furnish all information concerning the
AC Fund and the holders of the AC Fund's shares as may be reasonably requested
in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
AC Fund shall make available to the VKM Trust a copy of each report, schedule,
registration statement and other document (the "Documents") filed or received by
it during such period pursuant to the requirements of Federal or state
securities laws or Federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law or which are not
relevant to the AC Fund). During the period prior to the Closing Date, the VKM
Trust shall make available to the AC Fund each Document pertaining to the
transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).
E. SHAREHOLDERS MEETING. The AC Fund shall call a meeting of the AC Fund
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to
each shareholder of the AC Fund as of the record date for such meeting of
shareholders. The AC Fund's Board of Directors shall recommend to the AC Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The AC Fund and VKM Trust covenant and agree
to coordinate the respective portfolios of the AC Fund and VKM Fund from the
date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VKM Fund's portfolio, the resulting
portfolio will meet the VKM Fund's investment objective, policies and
restrictions, as set forth in the VKM Fund's prospectus and Statement of
Additional Information, copies of which have been delivered to the AC Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the AC Fund covenants that it
shall cause to be distributed the VKM Fund Shares in the proper pro rata amount
for the benefit of AC Fund's shareholders and such that the AC Fund shall not
continue to hold amounts of said shares so as to cause a violation of Section
12(d)(1) of the Investment Company Act. The AC Fund covenants further that,
pursuant to Section 3G, it shall liquidate and dissolve as promptly as
practicable after the Closing Date. The AC Fund covenants to use all reasonable
efforts to cooperate with the VKM Trust and the VKM Trust's transfer agent in
the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the AC Fund and the VKM Trust represents that
no agent, broker, investment banker, financial advisor or other firm or person
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement, and each party shall hold the other harmless from and against any all
claims, liabilities or obligations with respect to any such fees, commissions or
expenses asserted by any person to be due or payable in connection with any of
the transactions contemplated by this Agreement on the basis of any act or
statement alleged to have been made by such first party or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement (including, without limitation, the execution of any documents,
agreements or certificates or any other additional actions reasonably requested
with respect to the non-assumption of the liabilities and obligations of the AC
Fund by the VKM Trust or the VKM Fund), the proper officers and trustees of each
party to this Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the AC Fund and the VKM Trust will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any press release or make any public statement prior
to such consultation, except as may be required by law or the rules of any
national securities exchange on which such party's securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund nor
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<PAGE> 9
the AC Fund shall take any action, or cause any action to be taken (including,
without limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to the
Closing Date, the VKM Trust, the VKM Fund and the AC Fund will take such action,
or cause such action to be taken, as is reasonably necessary to enable O'Melveny
& Myers, counsel to the AC Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the AC Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed in an
amount large enough so that it will have distributed substantially all (and in
any event not less than 98%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE AC FUND.
The obligations of the AC Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
AC Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of the AC Fund present in person or by proxy at a meeting
of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the VKM Trust contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business properties or assets of the VKM Fund, and the AC Fund shall
have received a certificate of the President or Vice President of the VKM Trust
satisfactory in form and substance to the AC Fund so stating. The VKM Trust
shall have performed and complied in all material respects with all agreements,
obligations and covenants required by this Agreement to be so performed or
complied with by it on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not have been any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement, which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse affect on business
operations of the VKM Fund.
F. TAX OPINION. The AC Fund shall have obtained an opinion from O'Melveny &
Myers, counsel for the AC Fund, dated as of the Closing Date, addressed to the
AC Fund, that the consummation of the transactions set forth in this Agreement
comply with the requirements of a reorganization as described in Section 368(a)
of the Internal Revenue Code of 1986, as amended, substantially in the form
attached as Annex A.
G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of the
Closing Date, addressed to the AC Fund substantially in the form attached hereto
as Annex B to the effect that: (i) the VKM Trust is duly formed and in good
standing as a business trust under the laws of the State of Delaware; (ii) the
Board of Trustees of the VKM Trust has duly designated the VKM Fund as a series
of the VKM Trust pursuant to the terms of the Declaration of Trust of the VKM
Trust; (iii) the VKM Fund is registered as an open-end, diversified management
company under the Securities Act of 1933 and the 1940 Act; (iv) this Agreement
and the reorganization provided for herein and the execution of this Agreement
have been duly authorized and approved by all requisite action of VKM Trust and
this Agreement has been duly executed and delivered by the VKM Trust and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the VKM Trust; (v) neither the
execution or delivery by the VKM Trust of this Agreement nor the consummation by
the VKM Trust or VKM Fund of the
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<PAGE> 10
transactions contemplated thereby contravene the VKM Trust's Declaration of
Trust, or, to the best of their knowledge, violate any provision of any statute
or any published regulation or any judgment or order disclosed to us by the VKM
Trust as being applicable to the VKM Trust or the VKM Fund; (vi) to the best of
their knowledge based solely on the certificate of an appropriate officer of the
VKM Trust attached hereto, there is no pending or threatened litigation which
would have the effect of prohibiting any material business practice or the
acquisition of any material property or the conduct of any material business of
the VKM Fund or might have a material adverse effect on the value of any assets
of the VKM Fund; (vii) the VKM Fund's Shares have been duly authorized and upon
issuance thereof in accordance with this Agreement will, subject to certain
matters regarding the liability of a shareholder of a Delaware trust, be validly
issued, fully paid and non-assessable; (viii) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions, as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to VKM Trust and the VKM Fund comply as to form in all material
respects with the requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the Commission thereunder
and no facts have come to counsel's attention which would cause them to believe
that as of the effectiveness of the portions of the Registration Statement
applicable to VKM Trust and VKM Fund, the Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and (ix) to the best of their knowledge and information and subject
to the qualifications set forth below, the execution and delivery by the VKM
Trust of the Agreement and the consummation of the transactions therein
contemplated do not require, under the laws of the States of Delaware or
Illinois or the federal laws of the United States, the consent, approval,
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained under
the Securities Act, the 1940 Act or the rules and regulations thereunder.)
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the AC Fund of any material benefit under the
Agreement; or (c) which can be readily obtained without significant delay or
expense to the AC Fund, without loss to the AC Fund of any material benefit
under the Agreement and without any material adverse effect on you during the
period such consent, approval, authorization, registration, qualification or
order was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the United States of America which, in our experience,
are normally applicable to transactions of the type provided for in the
Agreement and (c) court orders and judgments disclosed to us by the VKM Trust in
connection with this opinion. In addition, although counsel need not
specifically considered the possible applicability to the VKM Trust of any other
laws, orders or judgments, nothing has come to their attention in connection
with our representation of the VKM Trust in this transaction that has caused
them to conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. OFFICER CERTIFICATES. The AC Fund shall have received a certificate of
an authorized officer of the VKM Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the AC Fund.
8. CONDITIONS TO OBLIGATIONS OF VKM TRUST
The obligations of the VKM Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
VKM Trust of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the AC Fund contained herein shall be true in all material
respects of the Closing Date, and as of the Closing Date there shall have been
no material adverse change in the financial condition, results of operations,
business, properties or assets of the AC Fund since March 31, 1995 and the VKM
Trust shall have received a certificate of the Chairman or
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President of the AC Fund satisfactory in form and substance to the VKM Trust so
stating. The AC Fund shall have performed and complied in all material respects
with all agreements, obligations and covenants required by this Agreement to be
so performed or complied with by them on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
F. TAX OPINION. The VKM Trust shall have obtained an opinion from O'Melveny
& Myers, counsel for the AC Fund, dated as of the Closing Date, addressed to the
VKM Trust and VKM Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Internal Revenue Code of 1986 substantially in the form
attached as Annex A.
G. OPINION OF COUNSEL. The VKM Trust shall have received the opinion of
O'Melveny & Myers, counsel for AC Fund, dated as of the Closing Date, addressed
to the VKM Trust and VKM Fund, substantially in the form attached as Annex C to
the effect that: (i) the AC Fund is duly formed and in good standing as a trust
under the laws of the State of Delaware; (ii) the AC Fund is registered as an
open-end, diversified management company under the Securities Act of 1933 and
the 1940 Act; (iii) this Agreement and the reorganization provided for herein
and the execution of this Agreement have been duly authorized and approved by
all requisite action of the AC Fund and this Agreement has been duly executed
and delivered by the AC Fund and (assuming the Agreement is a valid and binding
obligation of the other parties thereto) is a valid and binding obligation of
the AC Fund; (iv) neither the execution or delivery by the AC Fund of this
Agreement nor the consummation by the AC Fund of the transactions contemplated
thereby contravene the AC Fund's Declaration of Trust or, to the best of their
knowledge, violate any provision of any statute, or any published regulation or
any judgment or order disclosed to us by the AC Fund as being applicable to the
AC Fund; (v) to the best of their knowledge based solely on the certificate of
an appropriate officer of the AC Fund attached hereto, there is no pending, or
threatened litigation which would have the effect of prohibiting any material
business practice or the acquisition of any material property or the conduct of
any material business of the AC Fund or might have a material adverse effect on
the value of any assets of the AC Fund; (vi) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the Registration
Statement filed pursuant to the Agreement, the portions thereof pertaining to
the AC Fund comply as to form in all material respects with their requirements
of the Securities Act, the Securities Exchange Act and the 1940 Act and the
rules and regulations of the Commission thereunder and no facts have come to
counsel's attention which cause them to believe that as of the effectiveness of
the portions of the Registration Statement applicable to the AC Fund, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and (vii) to the best of their
knowledge and information and subject to the qualifications set forth below, the
execution and delivery by the AC Fund of the Agreement and the consummation of
the transactions therein contemplated do not require, under the laws of the
States of Texas or Delaware, or the federal laws of the United States, the
consent, approval, authorization, registration, qualification or order of, or
filing with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or filing (a) which
may be required as a result of the involvement of other parties to the Agreement
in the transactions contemplated by the Agreement because of their legal or
regulatory status or because of any other facts specifically pertaining to them;
(b) the absence of which does not deprive the VKM Trust or VKM Fund of any
material benefit under such agreements; of (c) which can be readily obtained
without significant delay or expense to the VKM Trust or VKM Fund, without loss
to the VKM Trust or VKM Fund of any material benefit under the Agreement and
without any material adverse effect on them during the period such consent,
approval authorization, registration, qualification or order
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was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or fillings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Texas and Delaware and the United States of America which, in our experience,
are normally applicable to transactions of the type provided for in the
Agreement and (c) court orders and judgments disclosed to us by the AC Fund in
connection with the opinion. In addition, although counsel need not specifically
considered the possible applicability to the AC Fund of any other laws, orders
or judgments, nothing has come to their attention in connection with our
representations of the AC Fund in this transaction that has caused them to
conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. AC FUND LIABILITIES. Except as otherwise provided for herein, the AC
Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to have repaid in full any indebtedness for borrowed money and have
discharged or reserved for all of the AC Fund's known debts, liabilities and
obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
I. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall
consist solely of nondefaulted, liquid tax-exempt municipal securities, at least
80% of which shall be rated investment grade by S&P or Moody's cash and other
marketable securities which are in conformity with the VKM Fund's investment
objective, policy and restrictions as set forth in the VKM Fund's prospectus and
statement of additional information, copies of which have been delivered to the
AC Fund.
J. SHAREHOLDER LIST. The AC Fund shall have delivered to the VKM Trust an
updated list of all shareholders of the AC Fund, as reported by the AC Fund's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the AC Fund, taxpayer identification
numbers, Form W-9 and last known address.
K. OFFICER CERTIFICATES. The VKM Trust shall have received a certificate
of an authorized officer of the AC Fund, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 4 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Directors and shareholders shall be
furnished to the VKM Trust.
9. AMENDMENT, WAIVER AND TERMINATION
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Directors or Trustees, as the case may be, amend this
Agreement at any time before or after approval thereof by the shareholders
of the AC Fund; provided, however, that (i) after such AC Fund shareholder
approval, no amendment shall be made by the parties hereto which substantially
changes the terms of Sections 1, 2 and 3 hereof without obtaining AC Fund's
shareholder approval thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of the AC Fund and
the VKM Trust;
(ii) by the AC Fund, if the VKM Trust breaches in any material respect
any of its representations, warranties, covenants or agreements contained
in this Agreement; or
(iii) by the VKM Trust, if the AC Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement; or
(iv) by either the AC Fund or VKM Trust, if the Closing has not
occurred on or prior to September 30, 1995 (provided that the rights to
terminate this Agreement pursuant to this subsection (C) (iv) shall not be
available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of
the Closing to occur on or before such date); or
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(v) by the VKM Trust in the event that: (a) all the conditions
precedent to the AC Fund's obligation to close, as set forth in Section 7
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the VKM Trust gives the AC Fund written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 8 of this Agreement; and (c) the AC Fund then fails or refuses
to close within the earlier of five (5) business days or September 30,
1995; or
(vi) by the AC Fund in the event that: (a) all the conditions
precedent to the VKM Trust's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the AC Fund gives the VKM Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
the conditions precedent to the AC Fund's obligation to close, as set forth
in Section 7 of this Agreement; and (c) the VKM Trust then fails or refuses
to close within the earlier of five (5) business days or September 30,
1995.
10. REMEDIES
In the event of termination of this Agreement by either or both of the AC Fund
and VKM Trust pursuant to Section 9(C), written notice thereof shall forthwith
be given by the terminating party to the other party hereto, and this Agreement
shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without further
action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
(A) SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the VKM Trust's and the AC Fund's right to seek
indemnity pursuant to this Agreement shall survive for a period of ninety (90)
days beyond the expiration of the Survival Period of the representation,
warranty, covenant or agreement upon which indemnity is sought. In no event
shall the VKM Trust or the AC Fund be obligated to indemnify the other if
indemnity is not sought within ninety (90) days of the expiration of the
applicable Survival Period.
(B) INDEMNIFICATION. The AC Fund shall indemnity and defend VKM Trust, VKM
Fund, their officers, trustees, agents and persons controlled by or controlling
any of them and hold them harmless, from and against any and all losses,
damages, liabilities, claims, demands, judgments, settlements, deficiencies,
taxes, assessments, charges, costs and expenses of any nature whatsoever
(including reasonable attorneys' fees) including amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and counsel fees reasonably
incurred by such indemnitee in connection with the defense or disposition of any
claim, action, suit or other proceeding, whether civil or criminal, before any
court or administrative or investigative body in which such indemnitee may be or
may have be en involved as a party or otherwise or with which such indemnitee
may be or may have been threatened, (collectively, the "Losses") resulting from
or arising out of any of the following:
(i) all debts, liabilities and obligations of the AC Fund of any
nature, whether accrued, absolute, contingent or otherwise, including
liabilities or obligations relating to the Assets (whether or not disclosed
to the VKM Trust and whether or not known by the AC Fund); and
(ii) taxes of any kind in respect of the AC Fund whether imposed on
the AC Fund or on any shareholder of the AC Fund.
(C) REPRESENTATIONS AND WARRANTIES. In addition to the indemnities provided
in Section 11(B) above, each party (an "Indemnitor") shall indemnify and hold
the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any Losses arising out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the Indemnitor; provided,
however, that no Indemnified Party shall be indemnified hereunder against any
Losses arising directly
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from such Indemnified Party's (i) willful misfeasance, (ii) bad faith, (iii)
gross negligence or (iv) reckless disregard of the duties involved in the
conduct of such Indemnified Party's position.
(D) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall given written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnitor or
thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the defense of such
matter, and in any event until Indemnitor states in writing that it will assume
the defense, Indemnitor shall pay all costs of Indemnified Party arising out of
the defense until the defense is assumed; provided, however, that Indemnified
Party shall consult with Indemnitor and obtain Indemnitor's consent to any
payment or settlement of any such claim. Indemnitor shall keep Indemnified Party
fully apprised at all times as to the status of the defense. If Indemnitor does
not assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided for
hereunder, Indemnitor shall be subrogated to all rights of Indemnified Party
with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made.
12. SURVIVAL
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the AC Fund shall be addressed to the
AC Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post Oak
Boulevard, Houston, TX 77056; Attention: General Counsel, with a copy to George
M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles, California
90071, or at such other address as the AC Fund may designate by written notice
to the VKM Trust. Notice to the VKM Trust shall be addressed to the VKM Trust
c/o Van Kampen American Capital Investment Advisory Corp., One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, Attention: General Counsel or at such other
address and to the attention of such other person as the VKM Trust may designate
by written notice to the AC Fund. Any notice shall be deemed to have been served
or given as of the date such notice is delivered personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
15. BOOKS AND RECORDS.
The AC Fund and the VKM Trust agree that copies of the books and records of
the AC Fund relating to the Assets including, but not limited to all files,
records, written materials; e.g., closing transcripts, surveillance files and
credit reports shall be delivered by the AC Fund to the VKM Trust at the Closing
Date. In addition to, and without limiting the foregoing, the AC Fund and the
VKM Trust agree to take such action as my be necessary in order that the VKM
Trust shall have reasonable access to such other books and records as may be
reasonably requested, all for three years after the Closing Date for the three
tax years ending December 31, 1992, December 31, 1993 and December 31, 1994
namely, general ledger, journal entries, voucher registers; distribution
journal; payroll register; monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.
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16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the AC Fund and
VKM Trust and delivered to each of the parties hereto. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. This Agreement is for the sole
benefit of the parties thereto, and nothing in this Agreement, expressed or
implied, is intended to confer upon any other person any rights or remedies
under or by reason of this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois without regard to
principles of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
A copy of the Declarations of Trust and the VKM Trust and AC Fund are on
file with the Secretary of the State of the State of Delaware and notice, is
hereby given and the parties hereto acknowledge and agree that this instrument
is executed on behalf of the Trustees of the VKM Trust and the AC Fund,
respectively, as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders of the VKM
Trust or AC Fund individually but binding only upon the assets and property of
the VKM Trust or the AC Fund as the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
AMERICAN CAPITAL MUNICIPAL BOND TRUST,
a Delaware business trust
By:
Title:
Attest:
Title:
VAN KAMPEN MERRITT TAX FREE FUND,
a Delaware business trust
By:
Title:
Attest:
Title:
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SCHEDULE 1
[LIST OF MARKETABLE SECURITIES] [AS AMENDED AT CLOSING]
16
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SCHEDULE 2
[AC FUND CONSENTS]
17
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ANNEX A
[TAX FREE OPINION: O'MELVENY & MYERS]
18
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ANNEX B
[OPINION OF COUNSEL -- SKADDEN, ARPS, SLATE, MEAGHER & FLOM FOR THE VKM TRUST]
19
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ANNEX C
[OPINION OF COUNSEL -- O'MELVENY & MYERS FOR THE AC FUND]
20
<PAGE> 1
EXHIBIT 4(b)
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
July , 1995, by and between the Van Kampen Merritt Tax Free Fund, a Delaware
business trust formed under the laws of the State of Delaware (the "VKM Trust")
on behalf of its series, the Van Kampen Merritt Insured Tax Free Income Fund
(the "VKM Fund") and the American Capital Tax-Exempt Trust, a Delaware business
trust formed under the laws of the (the "AC Trust") on behalf of its series
Insured Municipal Portfolio (the "AC Fund").
W I T N E S S E T H :
WHEREAS, on December 20, 1994, (the "Acquisition Date") The Van Kampen
Merritt Companies, Inc. ("TVKMC") acquired all of the issued and outstanding
shares of American Capital Management & Research, Inc. ("American Capital") and
subsequently changed its name to Van Kampen American Capital, Inc.;
WHEREAS, American Capital and TVKMC, through their affiliated companies,
sponsor and manage a number of registered investment companies; and
WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;
WHEREAS, the AC Trust was organized as a Massachusetts business trust, and
subsequently reorganized as a Delaware business trust pursuant to an Agreement
and Declaration of Trust dated [July , 1995] pursuant to which it is
authorized to issue an unlimited number of shares of beneficial interest for
each series of shares authorized by the trustees, one of which series is the AC
Fund the shares of which have a par value of $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management") provides
investment advisory and administrative services to the AC Portfolio;
WHEREAS, the VKM Trust was organized as a Massachusetts business trust,
pursuant to an Agreement and Declaration of Trust (the "Declaration of Trust")
dated [July , 1995], pursuant to which it is authorized to issue an unlimited
number of shares of beneficial interest for each series authorized by the
trustees, one of which series is the VKM Fund, the shares of which have a par
value of $0.01 per share;
WHEREAS, Van Kampen American Capital Investment Advisory Corp. (formerly,
Van Kampen Merritt Investment Advisory Corp.") ("Advisory Corp.") provides
investment advisory and administrative services to the VKM Fund;
WHEREAS, the Board of Trustees of the VKM Trust and the AC Trust had
determined that entering into this Agreement for the VKM Trust to acquire the
assets and liabilities of the AC Fund is in the best interests of the
shareholders of each respective fund; and
WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the AC Trust will convey, transfer and deliver
to the VKM Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the AC Fund (including accrued interest to the Closing Date)
consisting of nondefaulted, liquid, and insured municipal securities, due bills,
cash and other marketable securities of the AC Fund acceptable to the VKM Fund
as more fully set forth on Schedule 1 hereto, and as amended from time to time
prior to the Closing Date (as defined below), free and clear of all liens,
encumbrances and claims whatsoever (the assets so transferred collectively being
referred to as the "Assets").
B. CONSIDERATION. In consideration thereof, the VKM Trust agrees that on
the Closing Date the VKM Trust will (i) deliver to the AC Trust, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the VKM
Fund having net asset values per share calculated as provided in Section 3A
hereof, in an amount equal to the
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aggregate dollar value of the Assets net of the Liabilities determined pursuant
to Section 3A of this Agreement (collectively, the "VKM Fund Shares") and (ii)
assume all of the AC Fund's liabilities described in Section 3E hereof (the
"Liabilities"). All VKM Fund Shares delivered to the AC Trust in exchange for
such Assets shall be delivered at net asset value without sales load, commission
or other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the AC Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VKM Trust shall deliver to the AC Trust the VKM Fund
Shares in proportion and amounts equal to the total net asset values represented
by the Class A, Class B and Class C shares then outstanding in the AC Fund and
the AC Trust thereafter shall, in order to effect the distribution of such
shares to the AC Fund stockholders, instruct the VKM Trust to register the pro
rata interest in the VKM Fund Shares (in full and fractional shares) of each of
the holders of record of shares of the AC Fund in accordance with their holdings
of either Class A, Class B or Class C shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses and
taxpayer identification numbers), and the VKM Trust agrees promptly to comply
with said instruction. The VKM Trust shall have no obligation to inquire as to
the validity, propriety or correctness of such instruction, but shall assume
that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the AC Fund to be
transferred and assumed, respectively, by the VKM Fund shall be computed as of
the Closing Date, in the manner set forth in the most recent Prospectus and
Statement of Additional Information of the VKM Fund (collectively, the "VKM
Trust Prospectus"), copies of which have been delivered to the AC Trust.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the VKM Fund (the "Custodian") for
the benefit of the VKM Fund, duly endorsed in proper form for transfer in such
condition as to constitute a good delivery thereof, free and clear of all liens,
encumbrances and claims whatsoever, in accordance with the custom of brokers,
and shall be accompanied by all necessary state stock transfer stamps, the cost
of which shall be borne by the AC Fund.
C. FAILURE TO DELIVER SECURITIES. If the AC Trust is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the AC Fund's
securities for the reason that any of such securities purchased by the VKM Trust
have not yet been delivered to it by the AC Fund's broker or brokers, then, in
lieu of such delivery, the AC Trust shall deliver to the Custodian, with respect
to said securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other documents
as may be required by the VKM Trust or Custodian, including brokers'
confirmation slips.
D. SHAREHOLDER ACCOUNTS. The VKM Trust, in order to assist the AC Trust in
the distribution of the VKM Fund Shares to the AC Fund shareholders after
delivery of the VKM Fund Shares to the AC Trust, will establish pursuant to the
request of the AC Trust an open account with the VKM Fund for each shareholder
of the AC Fund and, upon request by the AC Trust, shall transfer to such account
the exact number of full and fractional Class A, Class B and Class C shares of
the VKM Fund then held by the AC Trust specified in the instruction provided
pursuant to Section 2 hereof. The VKM Fund is not required to issue certificates
representing VKM Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the AC Fund, certificates representing shares of
stock of the AC Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of the AC Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated the VKM Trust agrees to pay (i) for the reasonable outside expenses
for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the VKM Trust's Registration Statement on Form
N-14 (the "Registration
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Statement") and the solicitation of the AC Fund shareholder proxies; (ii) AC
Trust's counsel's reasonable attorney's fees, which fees shall be payable
pursuant to receipt of an itemized statement; and (iii) the cost of rendering
the tax opinion, more fully referenced in Section 7F below. In the event that
the transactions contemplated herein are not consummated for any reason, then
all reasonable outside expenses incurred to the date of termination of this
Agreement shall be borne by Advisory Corp.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the AC Trust shall voluntarily
dissolve and completely liquidate the AC Fund, by taking, in accordance with the
Delaware Business Trust Law and Federal securities laws, all steps as shall be
necessary and proper to effect a complete liquidation and dissolution of the AC
Fund. Immediately after the Closing Date, the stock transfer books relating to
the AC Fund shall be closed and no transfer of shares shall thereafter be made
on such books.
4. AC TRUST'S REPRESENTATIONS AND WARRANTIES.
The AC Trust, on behalf of the AC Fund, hereby represents and warrants to
the VKM Trust and agrees with the VKM Trust, which representations and
warranties are true and correct on the date hereof, that:
A. ORGANIZATION. The AC Trust is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and transact business
in the State of Delaware. The AC Fund is a separate series of the AC Trust duly
designated in accordance with the applicable provisions of the Declaration of
Trust. The AC Trust or AC Fund are qualified to do business in all jurisdictions
in which they are required to be so qualified, except jurisdictions in which the
failure to so qualify would not have a material adverse effect on either the AC
Trust or the AC Fund. The AC Trust has all material federal, state and local
authorization necessary to own all of the properties and assets allocated to the
AC Fund and to carry on its business and the business of the AC Fund as now
being conducted, except authorizations which the failure to so obtain would not
have a material adverse effect on the AC Trust or the AC Fund.
B. REGISTRATION. The AC Trust is registered under the Investment Company
Act of 1940 (the "1940 Act") as an open-end, diversified management company and
such registration has not been revoked or rescinded. The AC Trust is in
compliance in all material respects with the 1940 Act and the rules and
regulations thereunder with respect to its activities and those undertaken on
behalf of the AC Fund. All of the outstanding shares of beneficial interest of
the AC Fund have been duly authorized and are validly issued, fully paid and
non-assessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the AC Fund audited as of and for the year ended
November 30, 1994, true and complete copies of which have been heretofore
furnished to the VKM Trust, fairly represent the financial condition and the
results of operations of the AC Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The AC Trust shall furnish to the VKM Trust (i)
an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the AC Fund for the period ended June 30, 1995; and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the AC Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved and the results of its operations and changes
in financial position for the periods then ended; and such financial statements
shall be certified by the Treasurer of the AC Trust as complying with the
requirements hereof.
E. LIABILITIES. There are, and as of the Closing Date will be, no
contingent liabilities of the AC Fund not disclosed in the financial statements
delivered pursuant to Sections 4C and 4D which would materially affect the AC
Fund's financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the AC Trust or the
AC Fund which would, if adversely determined, materially affect the AC Fund's
financial condition. All Liabilities were incurred by the AC Fund in the
ordinary course of its business.
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F. MATERIAL AGREEMENTS. The AC Trust is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the AC
Fund's Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the AC Fund to which the AC Trust is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, Price Waterhouse, auditors
for the AC Trust, shall furnish the VKM Fund with a statement of the earnings
and profits of the AC Fund within the meaning of the Code as of the Closing
Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of
the AC Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of 1933,
(the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other tax returns and reports of the AC Fund required by law to have been
filed by such dates shall have been filed, and all Federal and other taxes shown
thereon shall have been paid so far as due, or provision shall have been made
for the payment thereof, and to the best of the AC Fund's knowledge no such
return is currently under audit and no assessment has been asserted with respect
to any such return.
J. CORPORATE AUTHORITY. The AC Trust has the necessary power to enter into
this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the AC Trust's
Board of Trustees, and except for obtaining approval of the holders of the
shares of beneficial interest of the AC Fund, no other corporate acts or
proceedings by the AC Trust or the AC Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the AC Trust and constitutes a legal, valid and
binding obligation of AC Trust enforceable in accordance with its terms.
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Trust does not and will not (i) violate
any provision of the Declaration of Trust or amendment thereof of the AC Trust
or the Declaration of Sub-Trust of the AC Fund, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the AC Trust, (iii) result in a violation or breach of,
or constitute a default under any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the AC Trust
is subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the AC Trust. Except as set forth in
Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or
filing with or notice to any court or governmental authority or agency is
required for the consummation by the AC Trust of the transactions contemplated
by this Agreement and (ii) no consent of or notice to any third party or entity
is required for the consummation by the AC Trust of the transactions
contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the AC
Fund, other than changes in the ordinary course of its business, or any
pending or threatened litigation, which has had or may have an adverse
material effect on such business, results of operations, assets or
financial condition;
(2) issued any option to purchase or other right to acquire shares of
the AC Fund granted by the AC Trust to any person other than subscriptions
to purchase shares at net asset value in accordance with terms in the
prospectus for the AC Fund;
(3) any entering into, amendment or termination of any contract or
agreement by AC Trust, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the AC Fund for borrowed money or any commitment to borrow
money entered into by the AC Fund or the AC Trust on behalf of the AC Fund;
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<PAGE> 5
(5) any amendment of the Declaration of Trust of the AC Trust or
Declaration of Sub-Trust of the AC Fund; or
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with
respect to covered options) upon any asset of the AC Fund other than a lien
for taxes not yet due and payable.
M. TITLE. On the Closing Date, the AC Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable and full right, power and authority to sell,
assign, transfer and delivery such Assets; upon delivery of such Assets, the VKM
Fund will receive good and marketable title to such Assets, free and clear of
all liens, mortgages, pledges, encumbrances, charges, claims and equities other
than a lien for taxes not yet due and payable.
N. PROXY STATEMENT. The AC Trust's Proxy Statement, at the time of
delivery by the AC Trust to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the AC Trust's
Prospectus and Statement of Additional Information with respect to the AC Fund
on the forms incorporated by reference into such Proxy Statement and as of their
respective dates (collectively, the "AC Trust's Proxy Statement/Prospectus"),
and at the time the Registration Statement becomes effective, the Registration
Statement insofar as it relates to the AC Trust and the AC Fund and at all times
subsequent thereto and including the Closing Date, as amended or as supplemented
if it shall have been amended or supplemented, conform and will conform, in all
material respects, to the applicable requirements of the applicable Federal and
state securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 4N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the VKM Trust, VKM Fund or their affiliates
furnished to the AC Trust by the VKM Trust.
O. BROKERS. There are no brokers or finders fees payable by the AC Trust
or the AC Fund in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The AC Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the VKM Fund
and those to which the Assets are subject.
5. THE VKM TRUST'S REPRESENTATIONS AND WARRANTIES.
The VKM Trust, on behalf of the VKM Fund, hereby represents and warrants to
the AC Trust and agrees with the AC Trust, which representations and warranties
are true and correct on the date hereof, that:
A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly formed
and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and VKM Fund
are qualified to do business in all jurisdictions in which they are required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on either the VKM Trust or VKM Fund. The VKM
Trust has all material federal, state and local authorization necessary to own
on behalf of the VKM Trust all of the properties and assets allocated to the VKM
Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have a
material adverse effect on the VKM Trust or VKM Fund.
B. REGISTRATION. The VKM Trust is registered under the 1940 Act as an
open-end, diversified management company and; such registration has not been
revoked or rescinded. The VKM Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest of the VKM Fund (subject to the
matters set forth in the Opinion of Counsel dated , from
Skadden, Arps, Slate, Meagher & Flom, to the VKM Trust, a copy of which is
contained in the VKM Trust's registration statement on Form N1-A, a copy of
which opinion letter has been tendered to the AC Trust) have been duly
authorized and are validly issued, fully paid and non-assessable and not subject
to pre-emptive dissenters rights.
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<PAGE> 6
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the VKM Fund audited as of and for the year ended
December 31, 1994, true and complete copies of which have been heretofore
furnished to the AC Trust fairly represent the financial condition and the
results of operations of the VKM Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Trust (i)
an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended March 31, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the VKM Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a consistent
basis during the period involved and fairly present the financial position of
the VKM Fund as at the dates thereof and the results of its operations and
changes in financial position for the periods then ended; and such financial
statements shall be certified by the Treasurer of the VKM Trust as complying
with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the VKM
Fund not disclosed in the financial statements delivered pursuant to Sections 5C
and 5D and there are no legal, administrative, or other proceedings pending or,
to its knowledge, threatened against the VKM Fund which would, if adversely
determined, materially affect the VKM Fund's financial condition.
F. MATERIAL AGREEMENTS. The VKM Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the VKM
Fund's Prospectus and Statement of Additional Information, disclosed on Schedule
4 hereto, there are no material agreements outstanding to which the VKM Fund is
a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other tax returns and reports of the VKM Fund required by laws to have been
filed by such dates shall have been filed, and all Federal and other taxes shall
have been paid so far as due, or provision shall have been made for the payment
thereof, and to the best of the VKM Fund's knowledge no such return is currently
under audit and no assessment has been asserted with respect to any such return.
H. CORPORATE AUTHORITY. The VKM Trust has the necessary power under its
Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein have
been duly authorized by the VKM Trust's Board of Trustees, no other corporate
acts or proceedings by the VKM Trust or VKM Fund are necessary to authorize this
Agreement and the transactions contemplated herein. This Agreement has been duly
executed and delivered by the VKM Trust and constitutes a valid and binding
obligation of the VKM Trust enforceable in accordance with its terms.
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i) result
in a material violation of any provision of the Declaration of Trust of the VKM
Trust or the Designation of Series of the VKM Fund, (ii) result in a material
violation of any statute, law, judgment, writ, decree, order, regulation or rule
of any court or governmental authority applicable to the VKM Trust or (iii)
result in a material violation or breach of, or constitute a default under, or
result in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the VKM Trust pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the VKM Trust is subject. Except as set forth in Schedule 6
to this Agreement, (i) no consent, approval, authorization, order of filing with
notice to any court or governmental authority or agency is required for the
consummation by the VKM Trust of the transactions contemplated by this Agreement
and (ii) no consent of or notice to any third party or entity is required for
the consummation by the VKM Trust of the transactions contemplated by this
Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the VKM Fund which
would materially affect its financial condition.
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K. SHARES OF THE VKM FUND: REGISTRATION. The VKM Fund Shares to be issued
pursuant to Section 1 hereof will be duly registered under the Securities Act
and all applicable state securities laws.
L. SHARES OF THE VKM FUND: Authorization Subject to the matters set forth
in the Statement of Additional Information of the VKM Fund, under the heading
"The Fund and the Trust", a copy of which has been furnished to the AC Fund, the
shares of beneficial interest of the VKM Fund to be issued pursuant to Section 1
hereof have been duly authorized and, when issued in accordance with this
Agreement, will be validly issued and fully paid and non-assessable by the VKM
Trust and conform in all material respects to the description thereof contained
in the VKM Trust's Prospectus furnished to the AC Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
VKM Fund, other than changes in the ordinary course of its business, which has
had an adverse material effect on such business, results of operations, assets
or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein filed on Form N-14, the ("Registration Statement"), as of the
effective date of the Registration Statement, and at all times subsequent
thereto and including the Closing Date, as amended or as supplemented if they
shall have been amended or supplemented, will conform, in all material respects,
to the applicable requirements of the applicable Federal securities laws and the
rules and regulations of the SEC thereunder, and will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except that no
representations or warranties in this Section 5N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the AC Trust or the AC Fund furnished to the VKM Trust by the AC
Trust.
O. TAX QUALIFICATION. The VKM Fund has qualified as a regulated investment
company within the meaning of Section 851 of the Code for each of its taxable
years; and has satisfied the distribution requirements imposed by Section 852 of
the Code for each of its taxable years. For purposes of this Section, any
reference to the VKM Fund shall include its predecessors, a sub-trust of a
Massachusetts business trust organized and designated on [August 15, 1985] and
subsequently reorganized by merger with and into the VKM Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the AC Trust and VKM Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The AC Fund shall operate only in the ordinary course of
business consistent with prior practice. No party shall take any action that
would, or reasonably would be expected to, result in any of its representations
and warranties set forth in this Agreement being or becoming untrue in any
material respect.
B. GOVERNMENT FILINGS; CONSENTS. The AC Trust and VKM Trust shall file all
reports required to be filed by the AC Fund and VKM Trust with the SEC between
the date of this Agreement the Closing Date and shall deliver to the other party
copies of all such reports promptly after the same are filed. Except where
prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the AC
Trust and the VKM Trust shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the AC
Trust's Proxy Statement/Prospectus, each party hereto will cooperate with the
other and furnish to the other the information relating to the AC Trust, the AC
Fund, VKM Trust or VKM Fund, as the case may be, required by the Securities Act
or the Exchange Act and the rules and regulations thereunder, as the case may
be, to be set forth in the Registration Statement or the Proxy
Statement/Prospectus, as the case may be. The AC Trust shall promptly prepare
and file with the SEC the Proxy Statement/Prospectus and the VKM Trust shall
promptly prepare and file with the SEC the Registration Statement, in which the
Proxy Statement/Prospectus will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the AC Trust and its
affiliated persons, VKM Trust shall only include such information as is approved
by
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<PAGE> 8
the AC Trust for use in the Registration Statement. The VKM Trust shall not
amend or supplement any such information regarding the VKM Trust and such
affiliates without the prior written consent of the AC Trust which consent shall
not be unreasonably withheld. The VKM Trust shall promptly notify and provide
the AC Trust with copies of all amendments or supplements filed with respect to
the Registration Statement. The VKM Trust shall use all reasonable efforts to
have the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. The VKM Trust shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
now not so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of the VKM Trust's shares of beneficial
interest in the transactions contemplated by this Agreement, and the AC Fund
shall furnish all information concerning the AC Trust and the holders of the AC
Trust's shares as may be reasonably requested in connection with any such
action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
AC Trust shall make available to the VKM Trust a copy of each report, schedule,
registration statement and other document (the "Documents") filed or received by
it during such period pursuant to the requirements of Federal or state
securities laws or Federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law or which are not
relevant to the AC Fund). During the period prior to the Closing Date, the VKM
Trust shall make available to the AC Trust each Document pertaining to the
transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).
E. SHAREHOLDERS MEETING The AC Trust shall call a meeting of the AC Fund
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to
each shareholder of the AC Fund as of the record date for such meeting of
shareholders. The AC Trust's Board of Trustees shall recommend to the AC Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The AC Trust and VKM Trust covenant and
agree to coordinate the respective portfolios of the AC Fund and VKM Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VKM Fund's portfolio, the resulting
portfolio will meet the VKM Fund's investment objective, policies and
restrictions, as set forth in the VKM Fund's prospectus and Statement of
Additional Information, copies of which have been delivered to the AC Trust .
G. DISTRIBUTION OF THE SHARES. At Closing the AC Trust covenants that it
shall cause to be distributed the VKM Fund Shares in the proper pro rata amount
for the benefit of AC Fund's shareholders and such that neither the AC Trust nor
the AC Fund shall continue to hold amounts of said shares so as to cause a
violation of Section 12(d)(1) of the Investment Company Act. The AC Fund
covenants further that, pursuant to Section 3G, it shall liquidate and dissolve
the AC Fund as promptly as practicable after the Closing Date. The AC Trust
covenants to use all reasonable efforts to cooperate with the VKM Trust and the
VKM Trust's transfer agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the AC Trust and the VKM Trust represents that
no agent, broker, investment banker, financial advisor or other firm or person
is or will be entitled to any broker's or finder's fee or any other commission
or similar fee in connection with any of the transactions contemplated by this
Agreement, and each party shall hold the other harmless from and against any all
claims, liabilities or obligations with respect to any such fees, commissions or
expenses asserted by any person to be due or payable in connection with any of
the transactions contemplated by this Agreement on the basis of any act or
statement alleged to have been made by such first party or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement (including, without limitation, the execution of any documents,
agreements or certificates or any other additional actions reasonably requested
with respect to the non-assumption of the liabilities and obligations of the AC
Fund by the VKM Trust or the VKM Fund), the proper officers and trustees of each
party to this Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the AC Trust and the VKM Trust will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any
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<PAGE> 9
press release or make any public statement prior to such consultation, except as
may be required by law or the rules of any national securities exchange on which
such party's securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund nor the AC Fund shall
take any action, or cause any action to be taken (including, without limitation,
the filing of any tax return) that is inconsistent with such treatment or
results in the failure of the transaction to qualify as a reorganization within
meaning of Section 368(a) of the Code. At or prior to the Closing Date, the VKM
Trust, the VKM Fund and the AC Fund will take such action, or cause such action
to be taken, as is reasonably necessary to enable O'Melveny & Myers, counsel to
the AC Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the AC Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed in an
amount large enough so that it will have distributed substantially all (and in
any event not less than 98%) of its investment company taxable income (computed
without regard to any deduction for dividends paid) and realized net capital
gain, if any, for the current taxable year through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE AC TRUST
The obligations of the AC Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
AC Trust, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the VKM Trust contained herein shall be true in all material
respects as of the Closing Date, and as of the Closing Date there shall have
been no material adverse change in the financial condition, results of
operations, business properties or assets of the VKM Fund, and the AC Trust
shall have received a certificate of the President or Vice President of the VKM
Trust satisfactory in form and substance to the AC Trust so stating. The VKM
Trust shall have performed and complied in all material respects with all
agreements, obligations and covenants required by this Agreement to be so
performed or complied with by it on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "In
junction") preventing the consummation of the transactions contemplated by this
Agreement shall be in effect, nor shall any proceeding by any state, local or
federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the transactions
contemplated by this Agreement illegal or which has a material adverse affect on
the business operations of the VKM Fund.
F. TAX OPINION. The AC Trust shall have obtained an opinion from O'Melveny
& Myers, counsel for the AC Trust, dated as of the Closing Date, addressed to
the AC Trust, that the consum mation of the transactions set forth in this
Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Internal Revenue Code of 1986, as amended, substantially
in the form attached as Annex A.
G. OPINION OF COUNSEL. The AC Trust shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of the
Closing Date, addressed to the AC Trust and the AC Fund substantially in the
form attached hereto as Annex B to the effect that: (i) the VKM Trust is duly
formed and in good standing as a business trust under the laws of the State of
Delaware; (ii) the Board of Trustees of the VKM Trust has duly designated the
VKM Fund as a series of the VKM Trust pursuant to the terms of the Declaration
of Trust of the VKM Trust; (iii) the VKM Fund is registered as an open-end,
diversified management company under the Securities Act of 1933 and the 1940
Act; (iv) this Agreement and the reorganization provided for herein and the
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<PAGE> 10
execution of this Agreement have been duly authorized and approved by all
requisite action of VKM Trust and this Agreement has been duly executed and
delivered by the VKM Trust and (assuming the Agreement is a valid and binding
obligation of the other parties thereto) is a valid and binding obligation of
the VKM Trust; (v) neither the execution or delivery by the VKM Trust of this
Agreement nor the consummation by the VKM Trust or VKM Fund of the transactions
contemplated thereby contravene the VKM Trust's Declaration of Trust, or, to the
best of their knowledge, violate any provision of any statute or any published
regulation or any judgment or order disclosed to us by the VKM Trust as being
applicable to the VKM Trust or the VKM Fund; (vi) the VKM Fund's Shares have
been duly authorized and upon issuance thereof in accordance with this Agreement
will be validly issued, fully paid and non-assessable; (vii) to the best of
their knowledge based solely on the certificate of an appropriate officer of the
VKM Trust attached hereto, there is no pending or threatened litigation which
would have the effect of prohibiting any material business practice or the
acquisition of any material property or the conduct of any material business of
the VKM Fund or might have a material adverse effect on the value of any assets
of the VKM Fund; (viii) the VKM Fund's Shares have been duly authorized and upon
issuance thereof in accordance with this Agreement will, subject to certain
matters regarding the liability of a shareholder of a Delaware trust, be validly
issued, fully paid and non-assessable; (ix) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions, as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to VKM Trust and the VKM Fund comply as to form in all material
respects with the requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the Commission thereunder
and no facts have come to counsel's attention which would cause them to believe
that as of the effectiveness of the portions of the Registration Statement
applicable to VKM Trust and VKM Fund, the Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading; and (ix) to the best of their knowledge and information and subject
to the qualifications set forth below, the execution and delivery by the VKM
Trust of the Agreement and the consummation of the transactions therein
contemplated do not require, under the laws of the States of Delaware or
Illinois or the federal laws of the United States, the consent, approval,
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained under
the Securities Act, the 1940 Act or the rules and regulations thereunder.)
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the AC Fund of any material benefit under the
Agreement; or (c) which can be readily obtained without significant delay or
expense to the AC Fund, without loss to the AC Fund of any material benefit
under the Agreement and without any material adverse effect on you during the
period such consent, approval, authorization, registration, qualification or
order was obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the United States of America which, in our experience,
are normally applicable to transactions of the type provided for in the
Agreement and (c) court orders and judgments disclosed to us by the VKM Trust in
connection with this opinion. In addition, although counsel need not
specifically considered the possible applicability to the VKM Trust of any other
laws, orders or judgments, nothing has come to their attention in connection
with our representation of the VKM Trust in this transaction that has caused
them to conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. OFFICER CERTIFICATES. The AC Trust shall have received a certificate of
an authorized officer of the VKM Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the AC Trust.
8. CONDITIONS TO OBLIGATIONS OF VKM TRUST
The obligations of the VKM Trust hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
VKM Trust of the following conditions:
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<PAGE> 11
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the shares of beneficial interest of the AC Fund present in person
or by proxy at a meeting of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the AC Trust contained herein shall be true in all material
respects of the Closing Date, and as of the Closing Date there shall have been
no material adverse change in the financial condition, results of operations,
business, properties or assets of the AC Fund since March 31, 1995 and the VKM
Trust shall have received a certificate of the Chairman or President of the AC
Trust satisfactory in form and substance to the VKM Trust so stating. The AC
Trust and the AC Fund shall have performed and complied in all material respects
with all agreements, obligations and covenants required by this Agreement to be
so performed or complied with by them on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
F. TAX OPINION. The VKM Trust shall have obtained an opinion from
O'Melveny & Myers, counsel for the AC Trust, dated as of the Closing Date,
addressed to the VKM Trust and VKM Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal Revenue Code of
1986 substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The VKM Trust shall have received the opinion of
O'Melveny & Myers, counsel for AC Fund, dated as of the Closing Date, addressed
to the VKM Trust and VKM Fund, substantially in the form attached as Annex C to
the effect that: (i) the AC Fund is duly formed and in good standing as a trust
under the laws of the State of Delaware; (ii) the AC Fund is registered as an
open-end, diversified management company under the Securities Act of 1933 and
the 1940 Act; (iii) this Agreement and the reorganization provided for herein
and the execution of this Agreement have been duly authorized and approved by
all requisite action of the AC Fund and this Agreement has been duly executed
and delivered by the AC Fund and (assuming the Agreement is a valid and binding
obligation of the other parties thereto) is a valid and binding obligation of
the AC Fund; (iv) neither the execution or delivery by the AC Fund of this
Agreement nor the consummation by the AC Fund of the transactions contemplated
thereby contravene the AC Fund's Declaration of Trust or, to the best of their
knowledge, violate any provision of any statute, or any published regulation or
any judgment or order disclosed to us by the AC Fund as being applicable to the
AC Fund; (v) to the best of their knowledge based solely on the certificate of
an appropriate officer of the AC Fund attached hereto, there is no pending, or
threatened litigation which would have the effect of prohibiting any material
business practice or the acquisition of any material property or the conduct of
any material business of the AC Fund or might have a material adverse effect on
the value of any assets of the AC Fund; (vi) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the Registration
Statement filed pursuant to the Agreement, the portions thereof pertaining to
the AC Fund comply as to form in all material respects with their requirements
of the Securities Act, the Securities Exchange Act and the 1940 Act and the
rules and regulations of the Commission thereunder and no facts have come to
counsel's attention which cause them to believe that as of the effectiveness of
the portions of the Registration Statement applicable to the AC Fund, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading; and (vii) to the best of their
knowledge and information and subject to the qualifications set forth below, the
execution and delivery by the AC Fund of the Agreement and the consummation of
the transactions therein contemplated do not require, under the laws of the
States of Texas or Delaware, or the federal laws of the United States, the
consent, approval, authorization, registration, qualification or order of, or
filing with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as
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<PAGE> 12
to any such consent, approval, authorization, registration, qualification, order
or filing (a) which may be required as a result of the involvement of other
parties to the Agreement in the transactions contemplated by the Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them; (b) the absence of which does not deprive the
VKM Trust or VKM Fund of any material benefit under such agreements; of (c)
which can be readily obtained without significant delay or expense to the VKM
Trust or VKM Fund, without loss to the VKM Trust or VKM Fund of any material
benefit under the Agreement and without any material adverse effect on them
during the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
fillings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Texas and Delaware and the United States of America which,
in our experience, are normally applicable to transactions of the type provided
for in the Agreement and (c) court orders and judgments disclosed to us by the
AC Fund in connection with the opinion. In addition, although counsel need not
specifically considered the possible applicability to the AC Fund of any other
laws, orders or judgments, nothing has come to their attention in connection
with our representations of the AC Fund in this transaction that has caused them
to conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. AC FUND LIABILITIES. Except as otherwise provided for herein, the AC
Trust shall use reasonable efforts, consistent with its ordinary operating
procedures, to have repaid in full any indebtedness for borrowed money for the
account of the AC Fund and have discharged or reserved for all of the AC Fund's
known debts, liabilities and obligations including expenses, costs and charges
whether absolute or contingent, accrued or unaccrued.
I. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall
consist solely of nondefaulted, liquid and investment grade "utility securities"
(as defined in Section 1A), cash and other marketable securities which are in
conformity with the VKM Fund's investment objective, policy and restrictions as
set forth in the VKM Fund's prospectus and statement of additional information,
copies of which have been delivered to the AC Trust.
J. SHAREHOLDER LIST. The AC Trust shall have delivered to the VKM Trust an
updated list of all shareholders of the AC Fund, as reported by the AC Trust's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the AC Fund, taxpayer identification
numbers, Form W-9 and last known address.
K. OFFICER CERTIFICATES. The VKM Trust shall have received a certificate
of an authorized officer of the AC Trust, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 4 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be furnished
to the VKM Trust.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Directors or Trustees, as the case may be, amend this
Agreement at any time before or after approval thereof by the shareholders of
the AC Fund; provided, however, that (i) after such AC Fund shareholder
approval, no amendment shall be made by the parties hereto which substantially
changes the terms of Sections 1, 2 and 3 hereof without obtaining AC Fund's
shareholder approval thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of the AC Trust
and the VKM Trust;
(ii) by the AC Trust, if the VKM Trust breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement; or
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<PAGE> 13
(iii) by the VKM Trust, if the AC Trust breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement; or
(iv) by either the AC Trust or VKM Trust, if the Closing has not
occurred on or prior to September 30, 1995 (provided that the rights to
terminate this Agreement pursuant to this subsection (C) (iv) shall not be
available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of
the Closing to occur on or before such date); or
(v) by the VKM Trust in the event that: (a) all the conditions
precedent to the AC Trust's obligation to close, as set forth in Section 7
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the VKM Trust gives the AC Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 8 of this Agreement; and (c) the AC Trust then fails or refuses
to close within the earlier of five (5) business days or September 30,
1995; or
(vi) by the AC Trust in the event that: (a) all the conditions
precedent to the VKM Trust's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the AC Trust gives the VKM Trust written assurance of its
intent to close irrespective of the satisfaction or non-satisfaction of all
the conditions precedent to The AC Trust's obligation to close, as set
forth in Section 7 of this Agreement; and (c) the VKM Trust then fails or
refuses to close within the earlier of five (5) business days or September
30, 1995.
10. REMEDIES
In the event of termination of this Agreement by either or both of the AC
Trust and VKM Trust pursuant to Section 9(C), written notice thereof shall
forthwith be given by the terminating party to the other party hereto, and this
Agreement shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without further
action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
(A) SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the VKM Trust's and the AC Trust's right to seek
indemnity pursuant to this Agreement shall survive for a period of ninety (90)
days beyond the expiration of the Survival Period of the representation,
warranty, covenant or agreement upon which indemnity is sought. In no event
shall the VKM Trust or the AC Trust be obligated to indemnify the other if
indemnity is not sought within ninety (90) days of the expiration of the
applicable Survival Period.
(B) INDEMNIFICATION. The AC Trust shall indemnity and defend VKM Trust,
VKM Fund, their officers, trustees, agents and persons controlled by or
controlling any of them and hold them harmless, from and against any and all
losses, damages, liabilities, claims, demands, judgments, settlements,
deficiencies, taxes, assessments, charges, costs and expenses of any nature
whatsoever (including reasonable attorneys' fees) including amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by such indemnitee in connection with the defense or
disposition of any claim, action, suit or other proceeding, whether civil or
criminal, before any court or administrative or investigative body in which such
indemnitee may be or may have be en involved as a party or otherwise or with
which such indemnitee may be or may have been threatened, (collectively, the
"Losses") resulting from or arising out of any of the following:
(i) all debts, liabilities and obligations of the AC Fund of any
nature, whether accrued, absolute, contingent or otherwise, including
liabilities or obligations relating to the Assets (whether or not disclosed
to the VKM Trust and whether or not known by the AC Trust); and
(ii) taxes of any kind in respect of the AC Fund whether imposed on
the AC Fund or on any shareholder of the AC Fund.
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<PAGE> 14
(C) REPRESENTATIONS AND WARRANTIES. In addition to the indemnities
provided in Section 11(B) above, each party (an "Indemnitor") shall indemnify
and hold the other and its officers, directors, agents and persons controlled by
or controlling any of them (each an "Indemnified Party") harmless from and
against any Losses arising out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the Indemnitor; provided,
however, that no Indemnified Party shall be indemnified hereunder against any
Losses arising directly from such Indemnified Party's (i) willful misfeasance,
(ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties
involved in the conduct of such Indemnified Party's position.
(D) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall given written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnitor or
thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the defense of such
matter, and in any event until Indemnitor states in writing that it will assume
the defense, Indemnitor shall pay all costs of Indemnified Party arising out of
the defense until the defense is assumed; provided, however, that Indemnified
Party shall consult with Indemnitor and obtain Indemnitor's consent to any
payment or settlement of any such claim. Indemnitor shall keep Indemnified Party
fully apprised at all times as to the status of the defense. If Indemnitor does
not assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided for
hereunder, Indemnitor shall be subrogated to all rights of Indemnified Party
with respect to all third parties, firms or corporations relating to the matter
for which indemnification has been made.
12. SURVIVAL>
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the AC Trust shall be addressed to
the AC Trust c/o Van Kampen American Capital Asset Management, Inc., 2800 Post
Oak Boulevard, Houston, TX 77056; Attention: General Counsel, with a copy to
George M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, or at such other address as the AC Trust may designate by
written notice to the VKM Trust. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel or
at such other address and to the attention of such other person as the VKM Trust
may designate by written notice to the AC Trust. Any notice shall be deemed to
have been served or given as of the date such notice is delivered person ally or
mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
15. BOOKS AND RECORDS.
The AC Trust and the VKM Trust agree that copies of the books and records
of the AC Fund relating to the Assets including, but not limited to all files,
records, written materials; e.g., closing transcripts, surveillance files and
credit reports shall be delivered by the AC Trust to the VKM Trust at the
Closing Date. In addition to, and without limiting the foregoing, the AC Trust
and the VKM Trust agree to take such action as my be necessary in order that the
VKM Trust shall have reasonable access to such other books and records as may be
reasonably requested, all for
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<PAGE> 15
three years after the Closing Date for the three tax years ending December 31,
1992, December 31, 1993 and December 31, 1994 namely, general ledger, journal
entries, voucher registers; distribution journal; payroll register; monthly
balance owing report; income tax returns; tax depreciation schedules; and
investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the AC Trust and
VKM Trust and delivered to each of the parties hereto. The headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. This Agreement is for the sole
benefit of the parties thereto, and nothing in this Agreement, expressed or
implied, is intended to confer upon any other person any rights or remedies
under or by reason of this Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Illinois without regard to
principles of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
Copies of the Declarations of Trust of the AC Trust and the VKM Trust are
on file with the Secretary of State of the Delaware, and notice, is hereby given
and the parties hereto acknowledge and agree that this instrument is executed on
behalf of the Trustees of the AC Trust and the VKM Trust, respectively, as
Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders of the AC Trust and the VKM
Trust individually but binding only upon the assets and property of the VKM
Trusts or the AC Fund, as the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
AMERICAN CAPITAL TAX EXEMPT TRUST, a Delaware business trust.
By:
Title:
Attest:
Title:
VAN KAMPEN MERRITT TAX FREE FUND, a Delaware business trust.
By:
Title:
Attest:
Title:
15
<PAGE> 16
SCHEDULE 1
[LIST OF MARKETABLE SECURITIES] [AS AMENDED AT CLOSING]
16
<PAGE> 17
SCHEDULE 2
[AC TRUST CONSENTS]
17
<PAGE> 18
ANNEX A
[TAX FREE OPINION: O'MELVENY & MYERS]
18
<PAGE> 19
ANNEX B
[OPINION OF COUNSEL -- SKADDEN, ARPS, SLATE, MEAGHER & FLOM FOR THE VKM TRUST]
19
<PAGE> 20
ANNEX C
[OPINION OF COUNSEL -- O'MELVENY & MYERS FOR THE AC FUND]
20
<PAGE> 1
EXHIBIT 14(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of the registration statement on Form N-14 (the
"Registration Statement") of our report dated November 11, 1994, relating to
the financial statements and financial highlights of American Capital Municipal
Bond Fund, Inc., which appears in such Statement of Additional Information.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
June 1, 1995
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of the registration statement on Form N-14 (the "Registration
Statement") of our report dated January 16, 1995, relating to the financial
statements and financial highlights of the Insured Municipal Portfolio of
American Capital Tax-Exempt Trust, which appears in such Statement of
Additional Information.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Houston, Texas
June 1, 1995
<PAGE> 3
EXHIBIT 14(b)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt Municipal Income Fund:
We consent to the use of our report included herein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 30, 1995
<PAGE> 4
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 herein.
KPMG Peat Marwick LLP
Chicago, Illinois
May 30, 1995
<PAGE> 1
EXHIBIT 16
POWER OF ATTORNEY
The undersigned, being officers and trustees of Van Kampen Merritt Tax Free
Fund, a Massachusetts business trust (the "Trust"), do hereby, in the capacities
shown below, individually appoint Ronald A. Nyberg of Oakbrook Terrace,
Illinois, as the agent and attorney-in-fact with full power of substitution and
resubstitution, for each of the undersigned, to execute and deliver, for and on
behalf of the undersigned, the Registration Statement on Form N-14
("Registration Statement") to be filed with the Securities and Exchange
Commission on or about May 24, 1995, pursuant to the provisions of the
Securities Act of 1933, and any and all amendments to the Registration Statement
which may be filed by the Trust with the Securities and Exchange Commission.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute one
instrument.
Dated: May 18, 1995
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- ------------
<S> <C> <C>
/s/ DONALD C. MILLER Chairman and Trustee May 23, 1995
- ---------------------------------------------
Donald C. Miller
/s/ DENNIS J. McDONNELL President (Chief Executive May 23, 1995
- --------------------------------------------- Officer) and Trustee
Dennis J. McDonnell
/s/ R. CRAIG KENNEDY Trustee May 23, 1995
- ---------------------------------------------
R. Craig Kennedy
/s/ PHILIP P. GAUGHAN Trustee May 23, 1995
- ---------------------------------------------
Philip P. Gaughan
/s/ JACK E. NELSON Trustee May 23, 1995
- ---------------------------------------------
Jack E. Nelson
/s/ JEROME L. ROBINSON Trustee May 23, 1995
- ---------------------------------------------
Jerome L. Robinson
/s/ WAYNE W. WHALEN Trustee May 23, 1995
- ---------------------------------------------
Wayne W. Whalen
/s/ EDWARD C. WOOD III Vice President and Treasurer May 23, 1995
- --------------------------------------------- (Chief Financial Officer)
Edward C. Wood III
</TABLE>
<PAGE> 1
EXHIBIT 17(B)
PROXY
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
SPECIAL MEETING OF SHAREHOLDERS
[ ], 1995
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE VAN KAMPEN AMERICAN CAPITAL AC
FUND.
The undersigned holder of shares of common stock of the Van Kampen American
Capital Municipal Bond Fund, a Delaware business trust (the "AC Fund"), hereby
appoint Dennis J. McDonnell and Nori L. Gabert, and each of them, with full
power of substitution and revocation, as proxies to represent the undersigned at
the Special Meeting of Shareholders to be held at the [Transco Tower Auditorium,
Level 2, 2800 Post Oak Boulevard, Houston, Texas 77056, on [day], [September 8,
1995] at [TIME]], and any and all adjournments thereof (the "Special Meeting"),
and thereat to vote all shares of beneficial interest which the undersigned
would be entitled to vote, with all powers the undersigned would possess if
personally present, in accordance with the following instructions:
<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
------ ------ ------ The proposal to approve the Reorganization pursuant to
which the AC Fund would transfer substantially all of its
------ ------ ------ assets to the Van Kampen American Capital VK Fund (the
"VK Fund") in exchange for Class A, B or C Shares,
respectively, of the VK Fund, which Class A, B or C
Shares would be distributed to each shareholder of the AC
Fund and the AC Fund would be dissolved, as more fully
described in the Proxy Statement/Prospectus.
2. FOR AGAINST ABSTAIN
------ ------ ------ To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
------ ------ ------
</TABLE>
If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one
is present and voting then that one) shall have authority and may exercise
all powers granted hereby. This Proxy, when properly executed, will be
voted in accordance with the instructions marked hereon by the undersigned.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE
PROPOSALS DESCRIBED ABOVE AND IN THE DISCRETION OF THE PROXIES UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Special Meeting to be held on
[ ], 1995.
Dated , 1995
------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Signature(s)
Please sign exactly as your name or names appear on this Proxy. When signing as
attorney, trustee, executor, administrator, custodian, guardian or corporate
officer, please give full title. If shares are held jointly, each holder should
sign.
<PAGE> 1
EXHIBIT 17(C)
PROXY
VAN KAMPEN AMERICAN CAPITAL INSURED PORTFOLIO
SPECIAL MEETING OF SHAREHOLDERS
[ ], 1995
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE VAN KAMPEN AMERICAN CAPITAL
INSURED PORTFOLIO.
The undersigned holder of shares of common stock of the Van Kampen American
Capital Insured Portfolio, a Delaware business trust (the "AC Fund"), hereby
appoint [Dennis J. McDonnell] and [Nori L. Gabert], and each of them, with full
power of substitution and revocation, as proxies to represent the undersigned at
the Special Meeting of Shareholders to be held at the [Transco Tower Auditorium,
Level 2, 2800 Post Oak Boulevard, Houston, Texas 77056, on [day], [September 8,
1995] at [TIME]], and any and all adjournments thereof (the "Special Meeting"),
and thereat to vote all shares of beneficial interest which the undersigned
would be entitled to vote, with all powers the undersigned would possess if
personally present, in accordance with the following instructions:
<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
------ ------ ------ The proposal to approve the Reorganization pursuant to
which the Insured Portfolio would transfer substantially
------ ------ ------ all of its assets to the Van Kampen American Capital
Insured Fund (the "VK Fund") in exchange for Class A, B
or C Shares, respectively, of the VK Fund, which Class A,
B or C Shares would be distributed to each shareholder of
the AC Fund and the AC Fund would be dissolved, as more
fully described in the Proxy Statement/Prospectus.
2. FOR AGAINST ABSTAIN
------ ------ ------ To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
------ ------ ------
</TABLE>
If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one
is present and voting then that one) shall have authority and may exercise
all powers granted hereby. This Proxy, when properly executed, will be
voted in accordance with the instructions marked hereon by the undersigned.
IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE
PROPOSALS DESCRIBED ABOVE AND IN THE DISCRETION OF THE PROXIES UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Special Meeting to be held on
[ ], 1995.
Dated , 1995
------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Signature(s)
Please sign exactly as your name or names appear on this Proxy. When signing as
attorney, trustee, executor, administrator, custodian, guardian or corporate
officer, please give full title. If shares are held jointly, each holder should
sign.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> VKM MUNICIPAL INCOME FUND - A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 518,901,563
<SHARES-COMMON-STOCK> 34,768,092
<SHARES-COMMON-PRIOR> 36,973,304
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 495,814,695
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (32,205,506)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,891,335
<NUMBER-OF-SHARES-REDEEMED> (6,182,355)
<SHARES-REINVESTED> 1,085,808
<NET-CHANGE-IN-ASSETS> (1,821,198)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 545,671,916
<PER-SHARE-NAV-BEGIN> 16.164
<PER-SHARE-NII> .886
<PER-SHARE-GAIN-APPREC> (1.907)
<PER-SHARE-DIVIDEND> (.882)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.261
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>* This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> VKM MUNICIPAL INCOME FUND - B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 174,384,111
<SHARES-COMMON-STOCK> 11,128,652
<SHARES-COMMON-PRIOR> 10,422,152
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 158,705,886
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (8,547,628)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,909,204
<NUMBER-OF-SHARES-REDEEMED> (1,527,736)
<SHARES-REINVESTED> 325,032
<NET-CHANGE-IN-ASSETS> 9,492,807
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 165,994,307
<PER-SHARE-NAV-BEGIN> 16.139
<PER-SHARE-NII> .78
<PER-SHARE-GAIN-APPREC> (1.89)
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.261
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>* This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> VKM MUNICIPAL INCOME FUND - C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,365,588
<SHARES-COMMON-STOCK> 270,017
<SHARES-COMMON-PRIOR> 253,923
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 3,850,918
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (212,571)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 141,638
<NUMBER-OF-SHARES-REDEEMED> (134,564)
<SHARES-REINVESTED> 9,020
<NET-CHANGE-IN-ASSETS> (3,115,984)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 4,168,299
<PER-SHARE-NAV-BEGIN> 16.141
<PER-SHARE-NII> .783
<PER-SHARE-GAIN-APPREC> (1.894)
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.262
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 014
<NAME> VKM MUNICIPAL INCOME FUND - D
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> MAR-14-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,088,397
<SHARES-COMMON-STOCK> 68,899
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 982,615
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (55,216)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 133,104
<NUMBER-OF-SHARES-REDEEMED> (65,876)
<SHARES-REINVESTED> 1,671
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 1,174,079
<PER-SHARE-NAV-BEGIN> 15.29
<PER-SHARE-NII> .701
<PER-SHARE-GAIN-APPREC> (1.031)
<PER-SHARE-DIVIDEND> (.698)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.262
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> MUNI BOND CLASS A SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 326,930,927
<INVESTMENTS-AT-VALUE> 347,730,328
<RECEIVABLES> 7,444,445
<ASSETS-OTHER> 2,683
<OTHER-ITEMS-ASSETS> 63,719
<TOTAL-ASSETS> 355,241,175
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,211,389
<TOTAL-LIABILITIES> 2,211,389
<SENIOR-EQUITY> 353,883
<PAID-IN-CAPITAL-COMMON> 342,630,860
<SHARES-COMMON-STOCK> 30,671,176
<SHARES-COMMON-PRIOR> 31,463,264
<ACCUMULATED-NII-CURRENT> (878,838)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,875,520)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,799,401
<NET-ASSETS> 353,029,786
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 12,361,124
<OTHER-INCOME> 0
<EXPENSES-NET> 1,792,984
<NET-INVESTMENT-INCOME> 10,568,140
<REALIZED-GAINS-CURRENT> (406,001)
<APPREC-INCREASE-CURRENT> 5,430,649
<NET-CHANGE-FROM-OPS> 15,592,788
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,121,444
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,519,426
<NUMBER-OF-SHARES-REDEEMED> 2,866,089
<SHARES-REINVESTED> 554,575
<NET-CHANGE-IN-ASSETS> (1,227,282)
<ACCUMULATED-NII-PRIOR> (9,469,519)
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (1,127,187)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 865,032
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,792,984
<AVERAGE-NET-ASSETS> 300,892,193
<PER-SHARE-NAV-BEGIN> 9.82
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> .156
<PER-SHARE-DIVIDEND> .296
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> EXPENSE RATIO IS ANNUALIZED
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> MUNI BOND CLASS B SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3,922,453
<SHARES-COMMON-PRIOR> 3,791,614
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 992,532
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 617,796
<NUMBER-OF-SHARES-REDEEMED> 549,554
<SHARES-REINVESTED> 62,597
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 37,345,574
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .149
<PER-SHARE-DIVIDEND> .259
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> EXPENSE RATIO IS ANNUALIZED
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> MUNI BOND CLASS C SHARES
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 794,623
<SHARES-COMMON-PRIOR> 814,200
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 205,815
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 110,152
<NUMBER-OF-SHARES-REDEEMED> 143,583
<SHARES-REINVESTED> 13,854
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 7,775,177
<PER-SHARE-NAV-BEGIN> 9.83
<PER-SHARE-NII> .26
<PER-SHARE-GAIN-APPREC> .159
<PER-SHARE-DIVIDEND> .259
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.99
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> EXPENSE RATIO IS ANNUALIZED
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> INSURED TAX FREE INCOME FUND - A
<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> 032
<NAME> INSURED TAX FREE INCOME FUND - B
<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> 033
<NAME> INSURED TAX FREE INCOME FUND - C
<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> 034
<NAME> INSURED TAX FREE INCOME FUND - D
<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> 041
<NAME> INSURED MUNI - CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 106,701,512
<INVESTMENTS-AT-VALUE> 102,604,692
<RECEIVABLES> 3,052,167
<ASSETS-OTHER> 16,979
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 105,673,838
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 819,349
<TOTAL-LIABILITIES> 819,349
<SENIOR-EQUITY> 99,394
<PAID-IN-CAPITAL-COMMON> 114,706,725
<SHARES-COMMON-STOCK> 6,379,617
<SHARES-COMMON-PRIOR> 6,501,024
<ACCUMULATED-NII-CURRENT> 21,529
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,876,339)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4,096,820)
<NET-ASSETS> 104,854,489
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,473,020
<OTHER-INCOME> 0
<EXPENSES-NET> 1,602,539
<NET-INVESTMENT-INCOME> 5,870,481
<REALIZED-GAINS-CURRENT> (464,507)
<APPREC-INCREASE-CURRENT> (10,201,344)
<NET-CHANGE-FROM-OPS> (4,795,370)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,998,830)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,040,502
<NUMBER-OF-SHARES-REDEEMED> (1,344,232)
<SHARES-REINVESTED> 182,323
<NET-CHANGE-IN-ASSETS> (4,865,022)
<ACCUMULATED-NII-PRIOR> (6,077)
<ACCUMULATED-GAINS-PRIOR> (5,411,832)
<OVERDISTRIB-NII-PRIOR> (21,356)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 641,145
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,602,539
<AVERAGE-NET-ASSETS> 73,600,583
<PER-SHARE-NAV-BEGIN> 11.59
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> (1.043)
<PER-SHARE-DIVIDEND> (.607)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.55
<EXPENSE-RATIO> 1.15
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> INSURED MUNI- CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-01-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 3,379,577
<SHARES-COMMON-PRIOR> 2,968,548
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,770,263)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 959,397
<NUMBER-OF-SHARES-REDEEMED> (640,367)
<SHARES-REINVESTED> 91,999
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (9,946)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 37,872,127
<PER-SHARE-NAV-BEGIN> 11.58
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> (1.037)
<PER-SHARE-DIVIDEND> (0.523)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.55
<EXPENSE-RATIO> 1.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 043
<NAME> INSURED MUNI CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1994
<PERIOD-START> DEC-10-1993
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
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<NET-INVESTMENT-INCOME> 0
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<DISTRIBUTIONS-OF-INCOME> (73,782)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 240,049
<NUMBER-OF-SHARES-REDEEMED> (65,163)
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<PER-SHARE-GAIN-APPREC> (1.161)
<PER-SHARE-DIVIDEND> (.509)
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<AVG-DEBT-OUTSTANDING> 0
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</TABLE>