<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 1996
1933 ACT REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
<TABLE>
<S> <C>
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. ____ / /
POST-EFFECTIVE AMENDMENT NO. ____ / /
</TABLE>
---------------------
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
(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
---------------------
<TABLE>
<S> <C>
RONALD A. NYBERG, ESQ. COPIES TO:
VAN KAMPEN AMERICAN CAPITAL WAYNE W. WHALEN, ESQ.
TAX FREE TRUST 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>
---------------------
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 THIS 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 ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES AND
INTENDS TO FILE A FORM 24F-2 WITH THE COMMISSION FOR ITS FISCAL YEAR ENDING
DECEMBER 31, 1996 ON OR BEFORE MARCH 1, 1997. THEREFORE, NO FILING FEE IS DUE AT
THIS TIME.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains one Proxy Statement/Prospectus and one
Statement of Additional Information relating to one of the twelve series of the
Registrant: Van Kampen American Capital Municipal Income Fund. This Registration
Statement is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen American Capital
Municipal Income Fund
-- Letter to shareholders of Van Kampen American Capital Texas Tax Free
Income Fund
-- Notice of Special Meeting of Shareholders of Van Kampen American Capital
Texas Tax Free Income Fund
-- Proxy Statement/Prospectus regarding the proposed Reorganization of Van
Kampen American Capital Texas Tax Free Income Fund into Van Kampen
American Capital Municipal Income Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen American Capital Texas Tax Free Income Fund
into Van Kampen American Capital Municipal 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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<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............................... Outside front cover page of Proxy
Statement/Prospectus; Outside back
cover page of Proxy Statement
Prospectus
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
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; Exhibit B; Prospectus
and Statement of Additional
Information of the Municipal Fund
(incorporated by reference)
Item 6. Information about the Company Being Acquired......... Outside front cover page of Proxy
Statement/Prospectus; Summary;
Prospectus and Statement of
Additional Information of the
Texas Fund (incorporated by
reference)
Item 7. Voting Information................................... Voting Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
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................................. Incorporation of Documents by
Reference
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
DEAR VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") of Van Kampen American Capital Texas Tax Free Income Fund (the
"Texas Fund") into the Van Kampen American Capital Municipal Income Fund (the
"Municipal Fund"), a mutual fund which pursues a similar investment objective.
The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. We thought it also
would 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 Proxy
Statement/Prospectus.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the Texas Fund approve the Reorganization, the assets
and liabilities of the Texas Fund will be combined with those of the Municipal
Fund and you will become a shareholder of the Municipal Fund. You will receive
shares of the Municipal Fund approximately equal in value at the time of
issuance to the shares of the Texas Fund that you hold immediately prior to the
Reorganization. Holders of Class A shares of the Texas Fund will receive Class A
shares of the Municipal Fund; holders of Class B shares of the Texas Fund will
receive Class B shares of the Municipal Fund; and holders of Class C shares of
the Texas Fund will receive Class C shares of the Municipal Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
The purpose of the proposed Reorganization is to permit the shareholders of
the Texas Fund to (i) enjoy the lower operating expenses enjoyed by shareholders
of the Municipal Fund as a result of the Municipal Fund's larger net asset size
and the economies of scale associated therewith, (ii) eliminate the duplication
of services and expenses that currently exists as a result of the separate
operations of the funds and (iii) obtain greater portfolio diversity and
potentially lower portfolio transaction costs.
WHO ADVISES THE MUNICIPAL FUND AND PROVIDES OTHER SERVICES?
Van Kampen American Capital Investment Advisory Corp. (the "Municipal
Adviser") provides advisory services to the Municipal Fund under an arrangement
that is substantially similar to that currently in effect between the Texas Fund
and Van Kampen American Capital Asset Management, Inc. (the "Texas Adviser").
The contractual advisory fees payable by the Municipal Fund are less than the
contractual advisory fees applicable to the Texas Fund. Each of the Municipal
Adviser and the Texas Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. ("VKAC"). Van Kampen American Capital Distributors,
<PAGE> 5
Inc. serves as distributor of shares of both the Municipal Fund and the Texas
Fund. In addition, State Street Bank & Trust Company serves as the custodian of
both the Municipal Fund and the Texas Fund. ACCESS Investor Services, Inc.
serves as the transfer agent for both the Municipal Fund and the Texas Fund.
HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE MUNICIPAL FUND COMPARE TO
THOSE PAYABLE BY THE TEXAS FUND?
Management of the funds anticipates that, as a result of the Reorganization,
shareholders of the Texas Fund would be subject to lower investment advisory
fees and lower total operating expenses as a percentage of net assets.
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
You will pay no sales loads or commissions in connection with the
Reorganization. As more fully discussed in the combined Proxy
Statement/Prospectus, the holding period with respect to the contingent deferred
sales charge applicable to Class B shares or Class C shares of the Municipal
Fund acquired in the Reorganization will be measured from the time (i) the
holder purchased such Class B shares or Class C shares from the Texas Fund or
(ii) the holder purchased Class B shares or Class C shares of any other Van
Kampen American Capital open-end fund and subsequently exchanged them for shares
of the Texas Fund.
Shareholders of the Texas Fund are the primary beneficiaries of the
Reorganization. Accordingly, if the Reorganization is completed, the Texas Fund
will bear the costs associated with the Reorganization, such as printing and
mailing costs and other expenses associated with the Special Meeting. If the
Reorganization is not completed VKAC will bear the costs associated with the
Reorganization. See "SUMMARY -- The Proposed Reorganization" in the Proxy
Statement/Prospectus.
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE MUNICIPAL FUND? WHAT HAPPENS TO
MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
If the Reorganization is approved, your interest in shares of the Texas Fund
automatically will be converted into shares of the Municipal Fund and we will
send you written confirmation that this change has taken place. You will receive
the same class of shares of the Municipal Fund approximately equal in value to
your class of shares of the Texas Fund. No certificates for Municipal 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 Texas Fund, it is not necessary to surrender
such certificates.
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) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the
<PAGE> 6
Texas Fund will recognize no gain or loss upon the receipt solely of the shares
of the Municipal Fund in connection with the Reorganization. Additionally, the
Texas 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
Municipal Fund or as a result of its liquidation. The Municipal 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 Texas Fund
and that its holding period for such assets will include the period during which
assets were held by the Texas Fund.
WHAT IF I REDEEM MY SHARES OF THE TEXAS FUND BEFORE THE REORGANIZATION TAKES
PLACE?
If you choose to redeem your shares of the Texas 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 (800) 421-5666. Please
give this matter your prompt attention. We need to receive your proxy before the
shareholder meeting scheduled for September 10, 1996. If shareholders approve
the Reorganization, it is expected to take effect on or about September 12,
1996.
Thank you for your investment in Van Kampen American Capital Texas Tax Free
Income Fund.
Very truly yours,
Van Kampen American Capital
Texas Tax Free Income Fund
Don G. Powell
President and Trustee
<PAGE> 7
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
SEPTEMBER 10, 1996
A Special Meeting of shareholders of Van Kampen American Capital Texas Tax
Free Income Fund (the "Texas Fund") will be held at the offices of Van Kampen
American Capital, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on
September 10, 1996 at 2:00 p.m. (the "Special Meeting"), for the following
purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
Texas Fund would (i) transfer all of its assets to the Van Kampen American
Capital Municipal Income Fund (the "Municipal Fund") in exchange solely for
Class A, B and C shares of beneficial interest of the Municipal Fund and the
Municipal Fund's assumption of the liabilities of the Texas Fund, (ii)
distribute such shares of the Municipal Fund to the holders of shares of the
Texas Fund and (iii) 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 July 19, 1996 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Ronald A. Nyberg
Secretary
July 26, 1996
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 8
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Proxy Statement/Prospectus shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
SUBJECT TO COMPLETION -- DATED JUNE 21, 1996
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME 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 Texas Tax Free Income Fund (the "Texas Fund") and
relates to the Special Meeting of shareholders of the Texas Fund to be held at
the offices of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 on September 10, 1996 at 2:00 p.m. and at any and all
adjournments thereof (the "Special Meeting"). The purpose of the Special Meeting
is to approve or disapprove the proposed reorganization of the Texas Fund (the
"Reorganization") into the Van Kampen American Capital Municipal Income Fund
(the "Municipal Fund"). The Reorganization would result in shareholders of the
Texas Fund in effect exchanging their Class A, B and C shares of the Texas Fund
for corresponding Class A, B and C shares of the Municipal Fund. The purpose of
the Reorganization is to permit the shareholders of the Texas Fund to (i) enjoy
the lower operating expenses enjoyed by shareholders of the Municipal Fund as a
result of the Municipal Fund's larger net asset size and the economies of scale
associated therewith, (ii) eliminate the duplication of services and expenses
that currently exists as a result of the separate operations of the funds and
(iii) obtain greater portfolio diversity and potentially lower portfolio
transaction costs.
The Municipal Fund is an open-end, diversified management investment company
organized as a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "Tax Free Trust"). The investment objective of the
Municipal Fund is to provide investors with a high level of current income
exempt from federal income tax consistent with preservation of capital, which is
similar to that of the Texas Fund. There can be no assurance that the Municipal
Fund will achieve its investment objective. The address, principal executive
office and telephone number of both the Municipal Fund and the Texas Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800)
421-5666. The enclosed proxy and this Proxy Statement/Prospectus are first being
sent to Texas Fund shareholders on or about July 26, 1996.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<PAGE> 9
This Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Texas Fund should know before voting on the Reorganization
(in effect, investing in Class A, B or C shares of the Municipal Fund) and
constitutes an offering of Class A, B and C shares of beneficial interest, par
value $.01 per share, of the Municipal Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated July
26, 1996, relating to this Proxy Statement/Prospectus (the "Reorganization SAI")
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. A Prospectus (the "Municipal Fund Prospectus")
and Statement of Additional Information containing additional information about
the Municipal Fund, each dated April 29, 1996, have been filed with the SEC and
are incorporated herein by reference. A copy of the Municipal Fund Prospectus
accompanies this Proxy Statement/Prospectus. A Prospectus and Statement of
Additional Information containing additional information about the Texas Fund,
each dated January 30, 1996, have been filed with the SEC and are incorporated
herein by reference. Copies of the foregoing may be obtained without charge by
calling or writing to the Texas 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 Tax Free Trust, the Municipal Fund and the Texas 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 "1940 Act"), and in
accordance therewith file reports and other information with the SEC. Such
reports, other information and proxy statements filed by the Tax Free Trust, the
Municipal Fund and the Texas 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 26, 1996.
2
<PAGE> 10
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Proxy Statement/Prospectus and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Proxy Statement/Prospectus, the Board of
Trustees of the Texas Fund (the "Texas Board") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the Texas Fund. As a result of the Reorganization, shareholders of the Texas
Fund would acquire an interest in a more broadly diversified portfolio of
tax-exempt municipal securities and would be subject to lower contractual
investment advisory fees and total operating expenses as a percentage of net
assets.
Shareholders should read the entire Proxy Statement/Prospectus carefully
together with (i) the prospectus of the Texas Fund dated January 30, 1996 (the
"Texas Fund Prospectus") incorporated herein by reference, and (ii) the
prospectus of the Municipal Fund dated April 29, 1996 (the "Municipal 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 Municipal Fund only.
THE REORGANIZATION
This Proxy Statement/Prospectus is being furnished to shareholders of the
Texas Fund in connection with the proposed combination of the Texas Fund with
and into the Municipal Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization by and between the Texas Fund and the Tax
Free Trust, on behalf of the Municipal Fund (the "Agreement"). The Agreement
provides that the Texas Fund would (i) transfer all of its assets to the
Municipal Fund in exchange solely for Class A, B and C shares of the Municipal
Fund and the Municipal Fund's assumption of the liabilities of the Texas Fund,
(ii) dissolve pursuant to a plan of liquidation and dissolution to be adopted by
the Texas Board promptly following the Closing (as defined herein) and (iii) as
part of such dissolution, distribute to each shareholder of the Texas Fund
shares of the respective class of shares of the Municipal Fund approximately
equal in value to their existing shares of the Texas Fund (collectively, the
"Reorganization").
The Texas Board has unanimously determined that the Reorganization is in the
best interests of shareholders of each class of shares of the Texas 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 Municipal Fund (the
"Municipal Board"), has unanimously determined that the Reorganization is in the
best interests of the
3
<PAGE> 11
Municipal Fund and that the interests of each class of shares of existing
shareholders of the Municipal Fund will not be diluted as a result of the
Reorganization. The Texas Board and the Municipal Board unanimously approved the
Reorganization and the Agreement on January 26, 1996.
If the Reorganization is completed, the Texas Fund, as the primary beneficiary
of the Reorganization, will pay all of the expenses associated with the
Reorganization, including expenses incurred by the Municipal Fund. Payment of
such expenses will reduce the amount of Class A, B or C shares of the Municipal
Fund received by shareholders of the Texas Fund on a pro rata basis. If the
Reorganization is not completed, Van Kampen American Capital, Inc. ("VKAC"), the
parent corporation of the Texas Adviser and the Municipal Adviser, will bear all
of the costs associated with the Reorganization. The Texas Board has determined
that the arrangements regarding the payment of expenses and other charges
relating to the Reorganization are fair and equitable. See "THE PROPOSED
REORGANIZATION--Expenses" below.
The Texas Board is asking shareholders of the Texas Fund to approve the
Reorganization at a Special Meeting to be held on September 10, 1996. If
shareholders of the Texas Fund approve the Reorganization, it is expected that
the Closing will be on September 12, 1996, but it may be at a different time as
described herein.
THE TEXAS 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" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Texas Board believes that the proposed Reorganization would be in the best
interests of the shareholders of the Texas Fund because it would permit the
shareholders of the Texas Fund to (i) enjoy the lower operating expenses enjoyed
by shareholders of the Municipal Fund as a result of the Municipal Fund's larger
net asset size and the economies of scale associated therewith, (ii) eliminate
the duplication of services and expenses that currently exists as a result of
the separate operations of the funds, and (iii) obtain greater portfolio
diversity and potentially lower portfolio transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the Texas Fund, the Texas Board considered a number of factors,
including, but not limited to: (i) the capabilities and resources of the
Municipal Adviser and other service providers to the Municipal Fund in the areas
of marketing, investment and shareholder services; (ii) the expenses and
advisory fees applicable to the Texas Fund and the Municipal Fund before the
Reorganization
4
<PAGE> 12
and the estimated expense ratios of the Municipal Fund after the Reorganization;
(iii) the comparative investment performance of the Texas Fund and the Municipal
Fund; (iv) the terms and conditions of the Agreement and whether the
Reorganization would result in dilution of Texas Fund shareholder interests; (v)
the economies of scale potentially realized through the combination of the two
funds; (vi) the compatibility of the funds' service features available to
shareholders, including the retention of applicable holding periods and exchange
privileges; (vii) the costs estimated to be incurred by the respective funds as
a result of the Reorganization; (viii) the diminished probability of the State
of Texas adopting a state income tax and the future growth prospects of the
Texas Fund; and (ix) the anticipated tax consequences of the Reorganization.
In this regard, the Texas Board reviewed information provided by the Texas
Adviser, the Municipal Adviser and VKAC, relating to the anticipated cost
savings to the shareholders of the Texas Fund as a result of the Reorganization.
The Texas Board considered the probability that the elimination of duplicative
operations and the increase in asset levels of the combined fund after the
Reorganization would result in the following potential benefits for shareholders
of the Texas Fund, although there can, of course, be no assurances in this
regard:
(1) Achievement of Reduced Per Share Expenses and Economies of Scale.
Combining the net assets of the Texas Fund with the assets of the
Municipal Fund should lead to reduced total operating expenses for
shareholders of the Texas Fund, 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. The Municipal Fund also
pays lower investment advisory fees than the Texas Fund when no expense
reimbursements are in effect. Any significant reductions in expenses on a
per share basis should, in turn, have a favorable effect on the relative
total return to shareholders of the Texas Fund. Management anticipates
that the reorganization would have no or only a de minimis effect upon
current shareholders of the Municipal Fund.
(2) Elimination of Separate Operations. Consolidating the Texas Fund and the
Municipal Fund should eliminate the duplication of services and expenses
that currently exists as a result of their separate operations. For
example, the Texas Fund and the Municipal Fund currently are managed
separately by different affiliated investment entities. Consolidating the
separate operations of the Texas Fund with those of the Municipal Fund
should promote more efficient operations on a more cost-effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the Municipal Fund generally permits it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing and provide the opportunity for greater portfolio
diversity.
5
<PAGE> 13
Based upon these and other factors, the Texas Board unanimously determined that
the Reorganization is in the best interests of the shareholders of the Texas
Fund.
COMPARISON OF THE MUNICIPAL FUND AND THE TEXAS FUND
INVESTMENT OBJECTIVES. The Municipal Fund and the Texas Fund have similar
investment objectives. The investment objective of the Municipal 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 Texas
Fund is to provide as high a level of interest income exempt from federal income
tax and Texas state income tax, if any, as is consistent with the Texas Fund's
investment policies. The primary difference between the two investment
objectives is that the Texas Fund seeks income exempt from Texas state income
tax, but the Municipal Fund does not. Currently, however, Texas has no personal
or corporate income tax.
INVESTMENT POLICIES. The Municipal Fund and the Texas Fund have similar
investment policies insofar as each fund seeks to achieve its investment
objective under normal market conditions by investing at least 80% of its assets
in a portfolio of tax exempt municipal securities, all or substantially all of
which are rated, at the time of investment, BBB or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or higher by Moody's Investor Service, Inc.
("Moody's"). The Municipal Fund may invest up to 20% of its total assets in tax
exempt municipal securities rated below investment grade (but not lower than B-
by S&P or B3 by Moody's), but the Texas Fund may invest only up to 20% of its
net assets in such securities. As the table below indicates, the holdings of the
Municipal Fund and the Texas Fund have similar credit quality, although a larger
percentage of the Municipal Fund's holdings have the highest credit rating of
S&P and Moody's.
A comparison of the credit quality of the respective portfolios of the
Municipal Fund and the Texas Fund, as of April 30, 1996, is set forth in the
table below.
CREDIT QUALITY
(AS OF APRIL 30, 1996)
<TABLE>
<CAPTION>
MUNICIPAL FUND TEXAS FUND
--------------------------------- ---------------------------------
RATED UNRATED AT RATED UNRATED AT
CREDIT RATING SECURITIES COMPARABLE QUALITY SECURITIES COMPARABLE QUALITY
- -------------------- ---------- ------------------ ---------- ------------------
<S> <C> <C> <C> <C>
Aaa/AAA............. 36.3 3.7 30.5 --
Aa/AA............... 6.6 -- 9.2 --
A/A................. 13.6 0.8 22.3 --
Baa/BBB............. 19.2 5.0 21.9 15.5
Ba/BB............... 1.9 6.5 0.6 --
B/B................. 0.3 5.4 -- --
Caa/CCC............. -- 0.7 -- --
Ca/CC............... -- -- -- --
C/C................. -- -- -- --
----- ----- ----- ---- -
TOTAL....... 100.0% 22.1% 100.0% 15.5%
===== ===== ===== =====
</TABLE>
6
<PAGE> 14
The Texas Fund and the Municipal Fund have different policies with respect to
diversification. The Texas Fund is a non-diversified investment company. The
Municipal Fund is a diversified investment company. A non-diversified investment
company such as the Texas Fund may invest a higher percentage of its assets in
relatively fewer issuers than a diversified investment company such as the
Municipal Fund.
The Texas Fund and the Municipal Fund also have different policies with
respect to concentration. The Texas Fund ordinarily invests at least 65% of its
total assets in securities issued by the State of Texas, its political
subdivisions, agencies and instrumentalities ("Texas Securities"). The Municipal
Fund does not invest more than 25% of its total assets in securities of issuers
located in any one state or in any one industry.
The Municipal Fund may invest a substantial portion of its assets in
securities that are subject to the alternative minimum tax, while the Texas Fund
may only invest up to 20% of its assets in such securities. The Municipal Fund
may not be a suitable investment for shareholders of the Texas Fund subject to
the alternative minimum tax.
Each of the Texas Fund and the Municipal Fund has the ability to utilize
options and futures. Unlike the Texas Fund, the Municipal Fund also may engage
in interest rate transactions such as swaps, caps, floors or collars. Interest
rate swaps involve the exchange by the Municipal Fund and another party of their
respective commitments to pay or receive interest (e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). The purchase of a cap entitles the purchaser to receive payments on
a notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values. The Municipal Fund uses these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Municipal Fund may be obligated to pay.
The Municipal Fund may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters, whose rates vary
inversely with market rates of interest, or range or capped floaters, whose
rates are subject to periodic lifetime caps. Such municipal securities may, by
their terms, have economic characteristics comparable to, among other things, a
swap, cap, floor or collar transaction for a period of time prior to the
municipal security's stated maturity. The Texas Fund does not invest in such
securities.
7
<PAGE> 15
INVESTMENT ADVISERS. The Municipal Fund is managed by the Municipal Adviser.
The Texas Fund is managed by the Texas Adviser. The Municipal Adviser and Texas
Adviser are both wholly-owned subsidiaries of VKAC. The Municipal Adviser and
Texas Adviser are the primary investment advisers to the Van Kampen American
Capital funds. VKAC is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. VKAC's more than 40 open-end and 38 closed-end funds and more than
2,800 unit investment trusts are professionally distributed by leading financial
advisers nationwide. The business address of both the Municipal Adviser and the
Texas Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
ADVISORY AND OTHER FEES. Advisory fees and total operating expenses of the
Municipal Fund generally are lower than those of the Texas Fund. The Municipal
Fund pays the Municipal Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.50% of the first $500 million of average
net assets and 0.45% of average net assets in excess of $500 million. As of
April 30, 1996, the Municipal Fund's net assets were approximately $1,016.4
million and the effective advisory fee on such assets was 0.474%. No expense
reimbursements were in effect with respect to the Municipal Fund at such time.
For a complete description of the Municipal Fund's advisory services, see the
sections of the Municipal Fund Prospectus and Statement of Additional
Information entitled "Investment Advisory Services" and "Investment Advisory and
Other Services -- Investment Advisory Agreement."
The Texas Fund pays the Texas Adviser a monthly fee based on its average daily
net asset value at the annual rate of 0.60% of the first $300 million of average
net assets; 0.55% of the next $300 million of average net assets; and 0.50% of
average net assets in excess of $600 million. As of April 30, 1996, the Texas
Fund's net assets were approximately $17.4 million and the effective advisory
fee on such assets was % (after expense reimbursement) and 0.60% (assuming no
expense reimbursement). For a complete description of the Texas Fund's advisory
services, see the sections of the Texas Fund Prospectus and Statement of
Additional Information entitled "Investment Advisory Services" and "Investment
Advisory Agreement."
The total operating expenses of the Municipal Fund for the fiscal year ended
December 31, 1995 were 0.99%, 1.73% and 1.72% of the average daily net assets
attributable to Class A, B and C shares, respectively. No expense reimbursements
were in effect with respect to the Municipal Fund during such period. Total
operating expenses (after expense reimbursement) of the Texas Fund for the six
month period ended March 31, 1996 (on an annualized basis) were 1.36%, 2.04% and
2.07% with respect to Class A, B and C shares, respectively. In the absence of
expense reimbursement, total operating expenses of the Texas Fund would have
been 1.93%, 2.61% and 2.64% with respect to Class A, B and C shares,
respectively.
8
<PAGE> 16
There can be no assurance that the Texas Adviser will continue to reimburse
expenses of the Texas Fund if the Reorganization is not completed.
Both the Municipal Fund and the Texas Fund have adopted similar distribution
plans (the "Distribution Plans") pursuant to Rule 12b-1 under the 1940 Act and
have adopted similar service agreements or plans (the "Service Plans"). Both the
Municipal Fund and the Texas Fund can pay 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 Municipal Fund
and the Texas Fund can pay 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 Municipal Fund and the Texas
Fund automatically convert to Class A shares after eight years. Class C shares
of the Municipal Fund and the Texas Fund automatically convert to Class A shares
after ten years. The distributor of both the Texas Fund's shares and the
Municipal Fund's shares is Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"). For a complete description of these arrangements with respect to
the Municipal Fund, see the section of the Municipal Fund Prospectus entitled
"The Distribution and Service Plans." For a complete description of these
arrangements with respect to the Texas Fund, see the sections of the Texas Fund
Prospectus and Statement of Additional Information entitled "Distribution
Plans."
The table below sets forth (i) the fees and expenses paid by the Municipal
Fund during its most recently completed fiscal year, (ii) fees and expenses paid
by the Texas Fund during the six month period ended March 31, 1996 (on an
annualized basis) and (iii) pro forma expenses for the combined fund.
9
<PAGE> 17
EXPENSE COMPARISON TABLE
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ ------------------
MUNICIPAL TEXAS MUNICIPAL TEXAS
FUND(1) FUND(2) PRO FORMA FUND(1) FUND(2)
--------- ------ --------- --------- ------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a percentage of
Offering Price)....................................................... 4.75%(3) 4.75% 4.75%(3) None None
Maximum Deferred Sales Charge (as a percentage of the lower of the
original purchase price or redemption proceeds)....................... None None None 4.00%(5) 4.00%(6)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ 0.48% 0.03% (4) 0.48% 0.48% 0.03%(4)
Rule 12b-1 Fees........................................................ 0.25% 0.23% 0.25% 1.00% 1.00%
Other Expenses......................................................... 0.26% 1.10% 0.26% 0.25% 1.01%
Total Fund Operating Expenses.......................................... 0.99% 1.36% (4) 0.99% 1.73% 2.04%(4)
Expense Example of Total Operating Expenses Assuming Redemption at the
End of the Period(8)
One Year.............................................................. $ 57 $ 61 $ 57 $ 58 $ 61
Three Years........................................................... $ 78 $ 89 $ 78 $ 89 $ 94
Five Years............................................................ $ 100 $ 118 $ 100 $ 109 $ 125
Ten Years............................................................. $ 163 $ 203 $ 163 $ 185 $ 219
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period(8)
One Year.............................................................. $ 57 $ 61 $ 57 $ 18 $ 21
Three Years........................................................... $ 78 $ 89 $ 78 $ 54 $ 64
Five Years............................................................ $ 100 $ 118 $ 100 $ 94 $ 110
Ten Years............................................................. $ 163 $ 203 $ 163 $ 185 $ 219
<CAPTION>
CLASS C SHARES
-------------------------------
MUNICIPAL TEXAS
PRO FORMA FUND(1) FUND(2) PRO FORMA
--------- --------- ------ ---------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a percentage of
Offering Price)....................................................... None None None None
Maximum Deferred Sales Charge (as a percentage of the lower of the
original purchase price or redemption proceeds)....................... 4.00%(5) 1.00%(7) 1.00%(7) 1.00%(7)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................................ 0.48% 0.48% 0.03%(4) 0.48%
Rule 12b-1 Fees........................................................ 1.00% 1.00% 1.00% 1.00%
Other Expenses......................................................... 0.25% 0.24% 1.04% 0.24%
Total Fund Operating Expenses.......................................... 1.73% 1.72% 2.07%(4) 1.72%
Expense Example of Total Operating Expenses Assuming Redemption at the
End of the Period(8)
One Year.............................................................. $ 58 $ 27 $ 31 $ 27
Three Years........................................................... $ 89 $ 54 $ 65 $ 54
Five Years............................................................ $ 109 $ 93 $ 111 $ 93
Ten Years............................................................. $ 185 $ 203 $ 240 $ 203
Expense Example of Total Operating Expenses Assuming No Redemption at
the End of the Period(8)
One Year.............................................................. $ 18 $ 17 $ 21 $ 17
Three Years........................................................... $ 54 $ 54 $ 65 $ 54
Five Years............................................................ $ 94 $ 93 $ 111 $ 93
Ten Years............................................................. $ 185 $ 203 $ 240 $ 203
</TABLE>
10
<PAGE> 18
(1) For the fiscal year ended December 31, 1995.
(2) For the six month period ended March 31, 1996, on an annualized basis.
(3) Class A shares of the Municipal Fund received pursuant to the
Reorganization will not be subject to a sales charge upon purchase.
(4) After expense reimbursement. In the absence of expense reimbursement,
Management Fees for the Texas Fund would have been 0.60% with respect to
Class A, B and C shares and Total Fund Operating Expenses for the Texas
Fund would have been 1.93%, 2.61% and 2.64% with respect to Class A, B and
C shares, respectively.
(5) Class B Shares of the Municipal 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 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 Municipal Fund acquired in the Reorganization will be
subject to the contingent deferred sales charge schedule applicable to
Class B shares of the Texas Fund. See Note 4.
(6) Class B shares of the Texas 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%.
(7) 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.
(8) Expenses examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization.
11
<PAGE> 19
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
Municipal Fund and the Texas Fund offer three classes of shares. The Class A
shares of both the Municipal Fund and the Texas Fund are subject to an initial
sales charge of up to 4.75%. The initial sales charge applicable to Class A
shares of the Municipal Fund will be waived for Class A Shares acquired in the
Reorganization. Any subsequent purchases of Class A shares of the Municipal 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 Municipal Fund or the Texas 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.
The Class B shares of both the Municipal Fund and the Texas 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 Municipal Fund and over a five year period in the case of the Texas
Fund. Class B shares of the Municipal Fund acquired in the Reorganization will
remain subject to the contingent deferred sales charge schedule applicable to
Class B shares of the Texas Fund.
The Class C shares of both the Municipal Fund and the Texas 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.
No contingent deferred sales charge will be imposed on Class B shares or Class
C shares of the Texas Fund in connection with the Reorganization.
Shares of either the Texas Fund and the Municipal Fund may be purchased by
check, by electronic transfer, by bank wire and by exchange from certain other
Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors.
With respect to fixed income securities, the Municipal Fund and the Texas 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 Municipal 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 asset value per share of the Texas Fund
in accordance with this pricing methodology, the net asset value per share would
have been $ , $
and $ on July 19, 1996 for Classes A, B and C shares, respectively. The Texas
Fund, however, generally computes net asset value per share by valuing fixed
income securities using the last reported bid price. When calculating the net
asset
12
<PAGE> 20
value per share of the Texas Fund in accordance with this pricing methodology,
the net asset value per share was $ , $ and $ on July 19, 1996 for
Classes A, B and C shares, respectively. In connection with the Reorganization,
the net assets of the Texas Fund will be calculated using the current pricing
methodology of the Municipal Fund. For this reason, the value of the Municipal
Fund shares received in connection with the Reorganization may be approximately
equal in value to the shares of the Texas Fund held immediately prior to the
Reorganization rather than identical in value.
Shares of the Municipal Fund and the Texas 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 Texas Fund or the Municipal 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 a short time 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 Texas Fund may be made after
the date on which the shareholders of the Texas Fund approve the Reorganization,
and the stock transfer books of the Texas 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 Texas Fund. Redemption requests or transfer
instructions received by the Texas Fund after that date will be treated by the
Texas Fund as requests for the redemption or instructions for transfer of the
shares of the Municipal Fund credited to the accounts of the shareholders of the
Texas Fund. Redemption requests or transfer instructions received by the Texas
Fund after the close of business on the day prior to the date of Closing will be
forwarded to the Municipal Fund. For a complete description of the redemption
arrangements for the Municipal Fund, see the section of the Municipal Fund
Prospectus entitled "Redemption of Shares," and the sections of the Texas Fund
Prospectus and Statement of Additional Information entitled "Redemption of
Shares" and "Purchase and Redemption of Shares."
CAPITALIZATION. The following table sets forth the capitalization of the Texas
Fund and the Municipal Fund as of April 30, 1996 and the pro forma combined
13
<PAGE> 21
capitalization of the combined fund as if the Reorganization had occurred on
that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF APRIL 30, 1996
<TABLE>
<CAPTION>
MUNICIPAL FUND TEXAS FUND PRO FORMA(1)
-------------- ----------- --------------
<S> <C> <C> <C>
NET ASSETS
Class A shares.......... $ 798,240,433 $ 9,691,066 $ 807,862,086
Class B shares.......... 205,358,975 6,957,580 212,266,689
Class C shares.......... 12,830,507 799,134 13,623,920
-------------- ----------- --------------
Total............ $1,016,429,915 $17,447,780 $1,033,752,695
============== =========== ==============
NET ASSET VALUE PER SHARE
Class A shares.......... $ 14.96 $ 10.01 $ 14.96
Class B shares.......... 14.96 10.01 14.96
Class C shares.......... 14.95 10.02 14.95
SHARES OUTSTANDING
Class A shares.......... 53,352,361 967,718 53,995,520
Class B shares.......... 13,725,686 695,196 14,187,432
Class C shares.......... 858,214 79,765 911,285
-------------- ----------- --------------
Total............ 67,936,261 1,742,679 69,094,237
============== =========== ==============
SHARES AUTHORIZED
Class A shares.......... Unlimited Unlimited Unlimited
Class B shares.......... Unlimited Unlimited Unlimited
Class C shares.......... Unlimited Unlimited Unlimited
</TABLE>
- ---------------
(1) The Pro Forma balances reflect the $125,000 of estimated costs associated
with the Reorganization which will be paid by the Texas Fund prior to
Closing.
PERFORMANCE INFORMATION. The average annual total return for the Texas Fund
for the one-year period, three-year period, and for the period beginning March
2, 1992 (the date Class A shares of the Texas Fund were first offered for sale
to the public) through April 30, 1996 were 1.94%, 3.99% and 6.01% in respect of
its Class A shares; for the one-year and three-year periods ended April 30, 1996
and for the period beginning July 27, 1992 (the date Class B shares of the Texas
Fund were first offered for sale to the public) were 2.14%, 3.95% and 4.75% in
respect of its Class B shares; and for the one-year period ended April 30, 1996
and for the period beginning August 30, 1993 (the date Class C shares of the
Texas Fund were first offered for sale to the public) were 5.24% and 4.01% in
respect of its Class C shares.
The average annual total return for Municipal Fund for the one-year,
three-year and five-year periods ended April 30, 1996 and for the period
beginning August 1, 1990 (the date Class A shares of the Municipal Fund were
first offered for sale to
14
<PAGE> 22
the public) through April 30, 1996 were 1.43%, 2.61%, 6.42% and 6.74% in respect
of its Class A shares; for the one-year and three-year periods ended April 30,
1996 and for the period since inception, the average annual total return for
Class B shares (inception August 24, 1992) was 1.60%, 2.49% and 4.12%; for the
one-year period ended April 30, 1996 and for the period since inception, the
average annual total return for Class C shares (inception August 13, 1993) was
4.53% and 2.68%.
The foregoing returns include the effect of the maximum sales charge
applicable to sales of shares of both the Municipal Fund and the Texas Fund. The
foregoing returns assume reinvestment of all dividends and distributions. Such
returns are not necessarily indicative of future results. The performance of an
investment company is the 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.
Management's discussion of the Municipal Fund's performance as of December 31,
1995 and management's discussion of the Texas Fund's performance as of September
30, 1995 are attached hereto as Exhibit A.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the Municipal Fund and the Texas Fund are similar
insofar as they each invest at least 80% of their assets in tax exempt municipal
securities. Each of the Municipal Fund and the Texas Fund also engages in
certain common investment practices such as the purchase and sale of futures and
options. To the extent that the investment objectives and policies of the
Municipal Fund and the Texas Fund are similar, the risks associated with an
investment in the funds are similar.
Investment in either of the Municipal Fund or the Texas Fund may not be
appropriate for all investors. Neither fund is intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
funds. An investment in either fund is intended to be a long-term investment and
should not be used as a trading vehicle.
DIFFERENCES IN RISKS
The Municipal Fund and the Texas Fund engage in some dissimilar investment
practices. To the extent that the investment practices of the funds differ, the
risks associated with an investment in the Municipal Fund are different from the
risks associated with an investment in the Texas Fund. For a complete
description of the
15
<PAGE> 23
risks of an investment in the Municipal Fund, see the sections of the Municipal
Fund Prospectus entitled "Investment Objective and Policies," "Municipal
Securities," "Investment Practices" and "Special Considerations Regarding the
Fund." For a complete description of the Texas Fund's investment practices, see
the section in the Texas Fund Prospectus entitled "Investment Practices" and
"Investment Objective and Policies" and the section of the Texas Fund's
Statement of Additional Information entitled "Additional Investment
Considerations."
DIVERSIFICATION. The Texas Fund is a non-diversified investment company. The
Municipal Fund is a diversified investment company. An investment company such
as the Texas Fund generally is more susceptible to economic, political or
regulatory events that adversely affect an issuer in which such fund invests
than a diversified investment company such as the Municipal Fund. A diversified
investment company such as the Municipal Fund, however, is less likely to
benefit from economic, political or regulatory events that beneficially affect
issuers in which it invests because it generally invests a smaller percentage of
its assets in each issuer in which it invests.
CONCENTRATION. The Texas Fund invests at least 65% of its assets in Texas
Securities. The Municipal Fund does not concentrate its investments in the
securities of issuers located in Texas or in any one other state. An investment
company such as the Texas Fund that concentrates its investments in any one
industry or in issuers located in any one state generally is more susceptible to
economic, political or regulatory events that adversely affect the industry or
state in which such company has concentrated its investments than an investment
company that does not concentrate its investments in any one industry or state.
The Municipal Fund, however, is less likely to benefit from economic, political
or regulatory events that beneficially affect issuers of Texas Securities or
issuers located in any one other state because it does not concentrate its
investments in issuers of Texas Securities or issuers located in any one other
state.
LOWER GRADE MUNICIPAL SECURITIES. The Municipal Fund may invest up to 20% of
its total assets in lower grade municipal securities and the Texas Fund may
invest up to 20% of its net assets in lower grade municipal securities. Such
lower rated securities commonly are referred to as "junk bonds" and are regarded
by Moody's and S&P as predominantly speculative with respect to the capacity to
pay interest or repay principal in accordance with their terms. Such securities
may be less liquid, more volatile and have less publicly available information
as compared to higher grade income securities.
SWAPS, CAPS AND FLOORS. The Municipal Fund may engage in interest rate
transactions such as swaps, caps, floors or collars in which the Texas Fund does
not engage. The Fund will not enter into any swap, cap, floor or collar
transaction unless, at the time of entering into such transaction, the unsecured
long-term debt of the counterparty to the transaction, combined with any credit
enhancements, is
16
<PAGE> 24
rated at least "A" by S&P or Moody's or has an equivalent equity rating from a
nationally recognized statistical ratings organization or is determined to be of
equivalent credit quality by the Municipal Adviser. If there is a default by
such counterparty, the Municipal Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. As a result, the swap market has become relatively liquid. Caps,
floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
DERIVATIVE VARIABLE RATE SECURITIES. The Municipal Fund may invest up to 15%
of its total assets in derivative variable rate securities such as inverse
floaters, whose rates vary inversely with market rates of interest or range or
capped floaters, whose rates are subject to periodic or lifetime caps. The Texas
Fund does not invest in such securities. The value of securities whose rates
vary inversely with market rates of interest generally will fluctuate in
response to changes in market rates of interest to a greater extent than the
value of an equal principal amount of a fixed rate municipal security having
similar credit quality, redemption provisions and maturity.
C. 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 as Appendix A to the Reorganization SAI, a copy of which may be
obtained without charge by calling the Municipal Fund or the Texas Fund at (800)
421-5666 and asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Municipal Fund series of the Tax Free Trust
would acquire all of the assets and the liabilities of the Texas Fund on the
date of the Closing in consideration for Class A, B and C shares of the
Municipal Fund.
Subject to Texas Fund shareholders approving 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
Municipal Fund and the Texas Fund may mutually agree.
On the date of Closing, the Texas Fund will transfer to the Municipal Fund all
of the assets and liabilities of the Texas Fund. The Tax Free Trust will in turn
transfer to the Texas Fund a number of Class A, B and C shares of the Municipal
Fund
17
<PAGE> 25
approximately equal in value to the value of the net assets of the Texas Fund
transferred to the Municipal Fund as of the date of Closing, as determined in
accordance with the valuation method described in the Municipal Fund's then
current prospectus. In order to minimize any potential for undesirable federal
income and excise tax consequences in connection with the Reorganization, the
Municipal Fund and the Texas Fund may distribute on or before the Closing all or
substantially all of their respective undistributed net investment income
(including net capital gains) as of such date.
The Texas Fund expects to distribute the Class A, B and C shares of the
Municipal Fund to the shareholders of the Texas Fund promptly after the Closing
and then dissolve pursuant to a plan of dissolution adopted by the Texas Board.
The Texas Fund and the Tax Free Trust have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.
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 Texas Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or 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 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 Agreement;
5. the effectiveness under applicable law of the registration statement of
the Municipal Fund of which this Proxy Statement/Prospectus forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; 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 Texas
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of Texas Fund
shareholders. The Agreement also may be terminated by the non-breaching party if
there has
18
<PAGE> 26
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.
The Texas Fund Board recommends that you vote to approve the Reorganization,
as it believes the Reorganization is in the best interests of the Texas Fund's
shareholders and that the interests of the Texas 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 Municipal Fund
being offered hereby are represented by transferable Class A, B and C shares,
par value $0.01 per share. The Declaration of Trust of the Tax Free Trust
permits the trustees, 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 1940 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 Municipal 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 Trust of the Tax Free Trust and the
Declaration of Trust of the Texas Fund are substantially similar.
Each of the Municipal Fund and the Texas Fund operates as a diversified, open-
end management investment company registered with the SEC under the 1940 Act.
Therefore, in addition to the specific voting rights described above,
shareholders of the Municipal Fund, as well as shareholders of the Texas 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 1940
Act, shareholders owning not less than 10% of the outstanding shares of the
Texas Fund or Municipal 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 Municipal Fund will establish an
account for each Texas Fund shareholder containing the appropriate number of
shares of the Municipal Fund. The shareholder services and shareholder programs
of the Municipal Fund and the Texas Fund are substantially identical.
Shareholders of the Texas Fund who are accumulating Texas Fund shares under the
dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to Texas Fund shares, will retain the same rights
and privileges after the Reorganization in connection with the Municipal Fund
Class A, B or C shares
19
<PAGE> 27
received in the Reorganization through substantially similar plans maintained by
the Municipal Fund. Van Kampen American Capital Trust Company will continue to
serve as custodian for the assets of Texas Fund shareholders held in IRA
accounts after the Reorganization. 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 Texas Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Texas 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 Texas Fund and
shareholders of the Municipal Fund. The discussion set forth below is for
general information only and may not apply to a holder subject to special
treatment under the Code, such as a holder that is a bank, an insurance company,
a dealer in securities, a tax-exempt organization or that acquired its Class A,
B and C shares of the Texas Fund pursuant to the exercise of employee stock
options or otherwise as compensation. It is based upon the Internal Revenue Code
of 1986, as amended (the "Code"), legislative history, 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
Texas 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 advisers 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 and
possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
Tax Free Trust and the Texas Fund receive an opinion from Skadden, Arps, Slate,
Meagher & Flom ("Skadden Arps") substantially to the effect that for federal
income tax purposes:
1. The acquisition by the Municipal Fund of the assets of the Texas Fund in
exchange solely for Class A, B and C shares of the Municipal Fund and the
assumption by the Municipal Fund of the liabilities of the Texas Fund
will qualify as a tax-free reorganization within the meaning of Section
368(a)(1) of the Code.
20
<PAGE> 28
2. No gain or loss will be recognized by the Texas Fund or the Municipal
Fund upon the transfer to the Municipal Fund of the assets of the Texas
Fund in exchange solely for the Class A, B and C shares of the Municipal
Fund and the assumption by the Municipal Fund of the liabilities of the
Texas Fund.
3. The Municipal Fund's basis in the Texas Fund assets received in the
Reorganization will, in each instance, equal the basis of such assets in
the hands of the Texas Fund immediately prior to the transfer, and the
Municipal Fund's holding period of such assets will, in each instance,
include the period during which the assets were held by the Texas Fund.
4. No gain or loss will be recognized by the shareholders of the Texas Fund
upon the exchange of their shares of the Texas Fund for the Class A, B or
C shares of the Municipal Fund.
5. The aggregate tax basis in the Class A, B and C shares of the Municipal
Fund received by the shareholders of the Texas Fund will be the same as
the aggregate tax basis of the shares of the Texas Fund surrendered in
exchange therefor.
6. The holding period of the Class A, B and C shares of the Municipal Fund
received by the shareholders of the Texas Fund will include the holding
period of the shares of the Texas Fund surrendered in exchange therefor
if such surrendered shares of the Texas Fund are held as capital assets
by such shareholder.
In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the Texas Fund and the Tax Free Trust and assume that the
Reorganization will be consummated as described in the Agreement and that
redemptions of shares of the Texas Fund occurring prior to the Closing will
consist solely of redemptions in the ordinary course of business.
The Municipal 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 Texas Fund and its shareholders.
EXPENSES
If the Reorganization is completed, the Texas Fund, as primary beneficiary of
the Reorganization, will pay all of the costs associated with the
Reorganization. Management of the Texas Fund estimates that Reorganization
expenses will equal approximately $125,000, or approximately $ per share of
the Texas Fund, based on the Texas Fund's net assets as of July 19, 1996. As of
March 31, 1996, the Texas Adviser reimbursed the Texas Fund for advisory
expenses in an amount equal to 0.57% of the Texas Fund's net assets. Based on
the Texas Fund's total operating expenses as of such date and after giving
effect to such expense reimbursements,
21
<PAGE> 29
management of the Texas Fund estimates that the Reorganization will reduce
expenses applicable to shareholders of Class A, B and C shares of the Texas Fund
by approximately 0.37%, 0.31% and 0.35% of net assets, respectively, and that
such savings will permit shareholders of the Texas Fund to recoup estimated
Reorganization expenses in approximately 17 months following the Reorganization.
There can be no assurance, however, that the Texas Adviser will continue to
reimburse expenses of the Texas Fund if the Reorganization is not approved.
Based on the Texas Fund's total operating expenses as of March 31, 1996 and
without giving effect to expense reimbursements in effect as of such date,
management of the Texas Fund estimates that the Reorganization will reduce
expenses applicable to shareholders of Class A, B and C shares of the Texas Fund
by approximately 0.94%, 0.88% and 0.92% of net assets, respectively, and that
such savings will permit shareholders of the Texas Fund to recoup estimated
Reorganization expenses in approximately 10 months following the Reorganization.
The Texas Board has determined that the foregoing arrangement with respect to
expenses is fair and reasonable in light of the relative benefits of the
Reorganization and that such expenses would not be dilutive to shareholders of
the Texas Fund.
If the Reorganization is not completed, VKAC will bear the costs associated
with the proposed Reorganization.
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND
RESTRICTIONS OF THE MUNICIPAL FUND
Approval of the Reorganization will constitute the ratification by Texas Fund
shareholders of the investment objective, policies and restrictions,
distribution plan and advisory agreement of the Municipal Fund. Approval of the
Reorganization will constitute approval of amendments to any of the fundamental
investment restrictions of the Texas 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 federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the Municipal Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the Municipal Fund. Wayne W. Whalen, a partner
of Skadden Arps, is a Trustee of the Tax Free Trust and the Texas Fund.
22
<PAGE> 30
D. RECOMMENDATION OF THE TEXAS BOARD
The Texas 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 Texas Fund. THE TEXAS BOARD RECOMMENDS VOTING FOR
THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE TEXAS FUND,
THE MUNICIPAL FUND AND VKAC
At the close of business on July 19, 1996, the record date with respect to the
Special Meeting, there were Class A shares, Class B shares
and Class C shares, respectively, of the Texas Fund.
Certain officers, directors and employees of VKAC own, in the aggregate, not
more than 7% of the common stock of VK/AC Holding, Inc., the parent corporation
of VKAC, and have the right to acquire, upon the exercise of options,
approximately an additional 13% of the common stock of VK/AC Holding, Inc. No
officer or trustee of the Municipal Fund or the Texas Fund owns or would be able
to acquire 5% or more of the common stock of VK/AC Holding, Inc.
The trustees and officers of the Texas Fund as a group own less than 1% of the
outstanding shares of the Texas Fund.
As of July 19, 1996, no person was known by the Texas Fund to own beneficially
or of record as much as 5% of the Class A shares of the Texas Fund.
As of July 19, 1996, no person was known by the Texas Fund to own beneficially
or of record as much as 5% of the Class B shares of the Texas Fund.
As of July 19, 1996, no person was known by the Texas Fund to own beneficially
or of record as much as 5% of the Class C shares of the Texas Fund.
At the close of business on July 19, 1996, there were Class A
shares, Class B shares and Class C shares, respectively, of the
Municipal Fund.
As of July 19, 1996, the trustees and officers as a group own less than 1% of
the shares of the Municipal Fund.
To the knowledge of the Municipal Fund, as of July 19, 1996 no person owned
beneficially or of record 5% or more of the Municipal Fund's Class A shares or
Class B shares.
As of July 19, 1996 the following persons owned of record or beneficially 5%
or more of the Municipal Fund's Class C shares:
23
<PAGE> 31
B. SHAREHOLDER PROPOSALS
As a general matter, the Municipal Fund does not intend to hold future regular
annual or special meetings of its shareholders unless required by the 1940 Act.
Any shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the Municipal Fund should send such proposal to the Municipal
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 Municipal 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
Holders of shares of the Texas Fund are entitled to one vote per share on
matters as to which they are entitled to vote. The Texas Fund does not utilize
cumulative voting.
Each valid proxy given by a shareholder of the Texas 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 Texas Board "FOR"
approval of the Reorganization.
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.
It is not anticipated that any action will be asked of the shareholders of the
Texas 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.
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 TEXAS 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
24
<PAGE> 32
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 [Texas Board] determined that adjournment and additional
solicitation was reasonable and in the best interest of the shareholders of the
Texas 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 Texas Fund are solicited by the Texas Board.
The cost of solicitation will be paid by the Texas Fund if the Reorganization is
completed. If the Reorganization is not completed, VKAC will bear the costs
associated with the Reorganization. In order to obtain the necessary quorum at
the Special Meeting, additional solicitation may be made by mail, telephone,
telegraph or personal interview by representatives of the Texas Adviser, the
Municipal Adviser or VKAC, or by dealers or their representatives. In addition,
such solicitation servicing may also be provided by Applied Mailing Systems, a
solicitation firm located in Boston, Massachusetts, at a cost estimated to be
approximately $ , plus reasonable expenses.
July 26, 1996
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
25
<PAGE> 33
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
MUNICIPAL FUND AND TEXAS FUND PERFORMANCE
Management's Discussion of Municipal Fund Performance as of the Annual Report
dated December 31, 1995.
LETTER TO SHAREHOLDERS
January 24, 1996
Dear Shareholder,
For most investors, it would be hard to surpass the success enjoyed during
1995. The stock and bond markets achieved substantial gains, driven by a
combination of continuing economic growth and low inflation. The strength of
equity and fixed-income securities in 1995 was particularly impressive because
it followed a year in which both markets declined. People who remained invested
during 1995 generally shared in the growth of the markets, while investors who
retreated after 1994's downturn may have missed out on the double-digit returns.
The rebound in the markets last year reinforces the importance of maintaining
a long-term perspective for your investments. While the environment for stocks
and bonds remains positive, it is unlikely that 1996 will see a repeat of the
markets' strong 1995 performance. However, over the long-term, stocks have
outperformed virtually all other types of investments, and bonds have met the
needs of investors who seek capital preservation and regular income.
ECONOMIC OVERVIEW
The U.S. economy grew throughout 1995, though the rate of growth slowed toward
year-end. The gross domestic product (the value of all goods and services
produced in the United States) grew at an annual rate of more than 4.2 percent
in the third quarter of 1995, but slowed to an estimated 2 to 3 percent in the
fourth quarter, with retail and auto sales particularly sluggish. The slower
growth rate eased concerns about a rise in inflation and allowed the Federal
Reserve Board to lower short-term interest rates by a quarter-percentage point
in late December. The reduction in rates during the latter half of 1995 is
expected to help generate moderate economic growth in 1996, just as the Fed's
raising of short-term rates in 1994 helped slow economic growth in 1995.
The cut in short-term rates, combined with modest growth forecasts, was viewed
by the financial markets as a positive event, pushing up both stock and bond
prices.
A-1
<PAGE> 34
For the year ended December 31, 1995, the Standard & Poor's 500-Stock Index
achieved a total return of 37.45 percent. The yield on 10-year Treasury notes
was 5.57 percent on December 31, compared to 7.83 percent at the beginning of
the year. Because bond prices and yields move in opposite directions, bond
prices rose. Many observers expect the Fed to cut rates further if Congress and
the President are able to reach an agreement on the federal budget, provided
economic conditions justify further easing.
With a low inflation, low interest rate environment, corporate earnings
remained quite strong during the year, helping to push stocks to new highs. The
strongest sectors were technology and finance, as these stocks benefited from
the impact of the Internet, telecommunications deregulation and bank mergers.
U.S. companies with global operations also did well, aided by a declining U.S.
dollar.
ECONOMIC OUTLOOK
Looking ahead, we are cautiously optimistic. We expect the economy to grow at
a rate of 2 to 3 percent throughout 1996, with growth stronger in the second
half of the year as the full impact of the Fed's rate cuts take effect. Lower
rates will have the greatest impact on interest-sensitive industries, such as
housing. Although inflation appears to be under control, there probably will be
some cyclical upward pressure in 1996.
The current economic conditions are ideal for stocks, especially those of
smaller companies, because they tend to be affected less by economic cycles. The
outlook for the fixed-income market--including municipal bonds--is positive,
too. In the near-term, we believe domestic markets will benefit from a stable
U.S. dollar and increased business activity driven in part by a number of
recently announced strategic reorganizations of some of the nation's blue chip
industry leaders.
During recent months, debate over tax reform and the federal deficit has
dominated the agenda in Washington. Now that we are in a presidential election
year, tax reform likely will replace the budget battle as the top issue in
Washington. There has been varied speculation about the impact tax reform could
have on the economy and on various types of investments. We are following the
tax reform debate very closely, and we will keep you updated on this issue
throughout the year. See the winter issue of Your Portfolio for a detailed
discussion of tax reform.
On the following pages, you can read about your Fund's performance in 1995, as
well as the portfolio management team's outlook for the Fund in the coming
months. We hope that you will find this information helpful.
CORPORATE NEWS
As part of our commitment to helping you achieve your investment goals, Van
Kampen American Capital strives to provide shareholders with the best service in
A-2
<PAGE> 35
the mutual fund industry. That is why we are especially pleased to have received
the 1995 Quality Tested Service Seal, which is awarded annually by DALBAR, Inc.,
an independent research firm. The Seal, which symbolizes the achievement of the
highest tier of service in the mutual fund industry, was awarded to American
Capital annually from 1990 to 1994 and we are honored that the service provided
by Van Kampen American Capital has achieved the same level of excellence.
Sincerely,
<TABLE>
<S> <C>
Don G. Powell Dennis J. McDonnell
Chief Executive Officer President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1995
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)...................... 15.61% 14.74% 14.74%
One-year total return(2)...... 10.12% 10.74% 13.74%
Five-year average annual total
return(2)................... 7.66% N/A N/A
Life-of-Fund average annual
total return(2)............. 7.55% 5.12% 3.99%
Commencement date............. 08/01/90 08/24/92 08/13/93
Distribution Rates and Yield
Distribution rate(3).......... 5.40% 4.94% 4.94%
Taxable-equivalent
distribution rate(4)........ 8.44% 7.72% 7.72%
SEC Yield(5).................. 4.61% 4.08% 4.08%
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (4.75% for A shares)
or contingent deferred sales charge for early withdrawal (4% for B shares
and 1% for C shares).
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
A-3
<PAGE> 36
(4) Taxable-equivalent calculations reflect a federal income tax rate of 36%.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period ending December 30,
1995. Had certain expenses of the Fund not been assumed by VKAC, the SEC
Yield would have been 4.60%, 4.07% and 4.07% for Classes A, B and C,
respectively, and total returns would have been lower.
A portion of the interest income may be subject to the alternative minimum tax
(AMT).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
A-4
<PAGE> 37
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Municipal Income Fund vs. Lehman Brothers Municipal
Bond Index (August 1990 through December 1995)
[GRAPH]
Fund's Total Return
1 Year Avg. Annual = 10.12%
5 Year Avg. Annual = 7.66%
Inception Avg. Annual = 7.55%
<TABLE>
Dec Dec Dec Dec Dec Dec
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Lehman Brothers Municipal Bond Index $10,286 $11,293 $11,536 $12,554 $14,095 $13,366
VKAC Municipal Income Fund 9,771 10,931 11,137 12,216 13,706 12,832
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended December 31,
1995, and includes payment of the maximum sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-5
<PAGE> 38
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Municipal Income Fund about the key events and economic forces which shaped the
markets during the past fiscal year. The team includes David C. Johnson,
portfolio manager, and Peter W. Hegel, executive vice president for fixed-income
investments. The following excerpts reflect their views on the Fund's
performance during the twelve-month period ended December 31, 1995.
<TABLE>
<S> <C>
WHAT WERE SOME OF THE IMPORTANT EVENTS OR MARKET CONDITIONS
Q THAT HAD AN IMPACT ON THE FUND'S PERFORMANCE DURING 1995?
The bond market in general was quite strong in 1995, and
A municipal securities, of course, participated in the year's
rally. Clearly, the
environment for investing in fixed-income securities was extremely
favorable across the board.
</TABLE>
Inflation continued to remain in check, with rates hovering around the 2
percent range, while the economy grew at a fairly steady but modest pace. As a
result, the Federal Reserve Board lowered its key lending rate (the federal
funds rate) by one quarter percentage point in July of 1995 and again, by
one-quarter of a percentage point, in December. Naturally, bond prices were
driven higher as rates trended downward over the course of the year (bond prices
go up when rates go down, and vice versa).
Another factor that had been priced into the municipal market late in the year
was the expectation that a federal budget agreement was inevitable. The market
anticipated a positive budget compromise, and reacted accordingly. Even though
the possibility of tax reform weighed on the market to some extent, the belief
that progress on the federal budget deficit would be made helped to bolster
municipal bonds, especially at the longer end of the maturity spectrum.
<TABLE>
<S> <C>
Q HOW WAS THE FUND POSITIONED TO TAKE ADVANTAGE OF MARKET
CONDITIONS?
Van Kampen American Capital Municipal Bond Fund was merged into
A the Van Kampen American Capital Municipal Income Fund earlier
this year.
The merger of the two Funds went smoothly and did not significantly
change the structure of the portfolio.
</TABLE>
In response to market challenges, the Fund maintained its portfolio and sought
to remain well diversified by sector concentration and rating distribution. As
of December 31, 1995, approximately 40 percent of total assets were rated AAA by
Standard & Poor's Ratings Group (their highest rating), while 20 percent were
non-rated securities.
Our strong internal credit research team includes six analysts who focus on
the high-yield sector, to help find the highest relative value available in the
market on lower-rated or non-rated issues. From a sector concentration
perspective, the Fund
A-6
<PAGE> 39
has exposure to eighteen different sectors--the largest being health care (20.6
percent as of December 31, 1995). We have analysts dedicated to researching the
health care industry, and our proprietary research database contains detailed
financial information on hundreds of hospitals and health care facilities across
the nation.
[PIE CHART]
PORTFOLIO COMPOSITION AS OF DECEMBER 31, 1995
<TABLE>
<S> <C>
Tax District 5.2%
Higher Education 5.2%
Retail/Electric/Gas/Telephone 5.3%
Wholesale Electric 6.0%
Water & Sewer 6.5%
General Purpose 6.9%
Transportation 7.0%
Single Family Housing 7.2%
Industrial Revenue 10.5%
Other* 19.6%
Health Care 20.6%
</TABLE>
* Other represents 8 sectors, each of which are less than 4%
Q HOW WELL DID THE FUND PERFORM UNDER THESE CONDITIONS?
The Fund responded well to the market over the previous year,
A and turned in a solid performance. The Fund's Class A share net
asset value increased over the course of 1995, closing the year at
$15.55 per share, up from $14.26 per share at the beginning of the
year. Over the twelve-month period ended December 31, 1995, Class A
share total return at net asset value, was 15.61 percent(1), compared
to the total return of the Lehman Brothers Municipal Bond Index,
a broad-based, unmanaged index, which was 17.46 percent for the same
period.
The Fund's Class A share distribution rate stood at 5.40 percent(3) as of
December 31, 1995, representing an attractive level of tax-exempt income. For an
investor in the 36 percent federal income tax bracket, that's the equivalent of
earning 8.44 percent(4) on a taxable investment. (Please refer to the chart on
page three for additional Fund performance results.)
Q WHAT IS YOUR OUTLOOK FOR THE FUND AND THE MARKET IN THE MONTHS
AHEAD?
We're confident that the investment environment will remain
A positive for fixed-income securities in the near-term.
Inflation appears to be under
control and the economy shows no signs of overheating.
A-7
<PAGE> 40
We anticipate the Fed will continue its accomodative monetary policy and
reduce the fed funds rate further during the first half of 1996. Based on the
historically high level of real interest rates (market rates less the inflation
rate), there seems to be room for short-term interest rates to trend lower,
which is a good sign for long-term rates as well.
We expect the supply of new municipal issues to be somewhat low in 1996, but
refunding activity should be high as the lower interest rate environment makes
it more attractive for municipalities to retire their higher-yielding
outstanding issues.
In general, conditions appear positive for the continuation of a favorable
environment in which to invest in fixed-income securities.
<TABLE>
<S> <C>
Peter W. Hegel David C. Johnson
Executive Vice President Portfolio Manager
Fixed Income Investments
</TABLE>
Please see footnotes on page A-3.
A-8
<PAGE> 41
Management's Discussion of Texas Fund Performance as of the Annual Report
dated September 30, 1995.
LETTER TO SHAREHOLDERS
November 7, 1995
Dear Shareholder:
The first nine months of 1995 have been very positive for most investors. Both
the fixed-income and stock markets have made considerable gains during the
period ended September 30, 1995.
This year serves as a reminder of just how quickly markets can move and how
difficult it can be to predict the timing of those movements. Moreover, this
year reinforces the importance of maintaining a long-term perspective and
reaffirms the principle that it is time--not timing--that leads to investment
success.
ECONOMIC OVERVIEW
Due in large part to the Federal Reserve Board's efforts to tighten monetary
supply in 1994, the economy has slowed significantly this year. Despite a
stronger-than-expected third quarter growth rate of 4.2 percent, economic growth
during the first half of the year was substantially lower than its fourth
quarter 1994 rate of 5.1 percent. And, while other key economic data, including
unemployment rates and housing starts, have shown mixed signs during recent
months, the general economic trends for the year continue to support a "soft
landing" scenario.
Comfortable with the economy's rate of growth and level of inflation, the Fed
reversed its trend of raising interest rates and lowered short-term rates by a
quarter percent on July 6. Financial markets, perceiving that the Fed's monetary
initiatives had taken hold without driving the economy into a recession, rallied
through much of the year. With slowing growth, interest rates declined and the
value of many fixed-income investments rose (bond yields and prices move in
opposite directions). For example, the yield on 30-year Treasury securities fell
from 7.88 percent at the end of December 1994 to 6.50 percent at the end of
September 1995, while its price rose more than 16 percent. Likewise, the yield
on the Bond Buyer's Municipal Bond Index fell from 7.28 percent at the end of
December to 6.23 percent at the end of September. Although municipal bond yields
have declined, they are still offering competitive yields, particularly to those
investors in higher tax brackets.
ECONOMIC OUTLOOK
We believe the Fed will move cautiously before it continues to lower
short-term rates, waiting for further signs that the economy has settled into a
slow growth
A-9
<PAGE> 42
pattern. We expect moderate growth, as economic data continues to send mixed
signals. We anticipate the economy will grow at an annual rate of 3 percent in
the fourth quarter and inflation will continue to run under 3 percent, driven by
slowing population and labor force growth.
Based upon a generally modest growth and low inflation outlook, we believe the
outlook for fixed-income markets--including municipal bonds--is positive. In the
near term, we believe domestic markets will benefit from a stable U.S. dollar
and an increase in business activity driven in part by a number of recently
announced strategic reorganizations of some of the nation's blue chip industry
leaders.
On the following pages, you can read about your Fund's performance for the
period, as well as portfolio management's outlook for the Fund in the coming
months. We hope that you will find the information contained in the
question-and-answer section helpful.
CORPORATE NEWS
On October 6 all Van Kampen American Capital open-end mutual funds, currently
listed in newspapers nationwide, began appearing under one heading. The new
listing reflects our company name and is abbreviated as "Van Kamp Amer Cap."
Once again, thank you for your continued confidence in your investment with
Van Kampen American Capital and for the privilege of working with you in seeking
to reach your financial goals.
Sincerely,
<TABLE>
<S> <C>
/s/Don G. Powell /s/Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management, Inc. Asset Management, Inc.
</TABLE>
A-10
<PAGE> 43
PERFORMANCE RESULTS FOR THE PERIOD ENDED SEPTEMBER 30, 1995
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)....................... 10.05% 9.11% 9.11%
One-year total return(2)....... 4.83% 5.11% 8.11%
Three-year average annual total
return(2).................... 5.20% 5.16% N/A
Life-of-Fund average annual
total
return(2).................... 6.15% 4.76% 3.85%
Commencement Date.............. 03/02/92 07/27/92 08/30/93
Distribution Rates and Yield
Distribution rate(3)........... 5.12% 4.67% 4.66%
Taxable equivalent distribution
rate(4)...................... 8.00% 7.30% 7.28%
SEC Yield(5)................... 4.96% 4.40% 4.40%
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares). The Adviser has subsidized a portion of the expenses.
Without this subsidy, the total returns would have been lower.
(2) Standardized total return for the period. Assumes reinvestment of all
distributions for the period ended and includes payment of the maximum sales
charge or contingent deferred sales charge for early withdrawal. The Adviser
has subsidized a portion of the expenses. Without this subsidy, the total
returns would have been lower.
(3) Distribution rate represents the monthly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
(4) Taxable equivalent calculations reflect federal income tax rate of 36%. A
portion of the interest income may be subject to the Federal alternative
minimum tax.
(5) SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio
should theoretically generate for the 30-day period as shown above.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
A-11
<PAGE> 44
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Lehman Brothers Municipal Bond
Index over time. As a broad-based, unmanaged statistical composite, this index
does not reflect any commissions or fees which would be incurred by an investor
purchasing the securities it represents. Similarly, its performance does not
reflect any sales charges or other costs which would be applicable to an
actively managed portfolio, such as that of the Fund.
A-12
<PAGE> 45
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Texas Tax Free Income Fund vs. Lehman Brothers
Municipal Bond Index (March 1992 through September 1995)
<TABLE>
<CAPTION>
Fund's Total Return
1 Year Avg. Annual = 4.83%
3 Year Avg. Annual = 5.20%
Inception Avg. Annual = 6.15%
[GRAPH]
Mar 1992 Dec 1992 Dec 1993 Dec 1994 Sep 1995
<S> <C> <C> <C> <C> <C>
Lehman Brothers Municipal
Bond Index 9,526 10,329 11,606 11,188 12,381
VKAC Texas Tax Free
Income Fund 10,000 10,849 12,182 11,552 13,031
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended September 30,
1995, and includes payment of the maximum sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-13
<PAGE> 46
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
The following is an interview with the management team of Van Kampen American
Capital Texas Tax Free Income Fund. The team is led by Joseph A. Piraro,
portfolio manager, and Peter W. Hegel, executive vice president, fixed-income
investments.
<TABLE>
<S> <C>
WHAT MARKET CONDITIONS HAD THE GREATEST IMPACT ON THE FUND'S
Q PERFORMANCE DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995.
While 1994 was generally a down year for the bond markets, 1995
A was characterized by a significant rally. The rally, which
began early in the
year and remained strong through July, resulted as the Federal Reserve
Board notched interest rates down to spur economic growth.
</TABLE>
Another market condition that has had a positive impact on the municipal bond
market (and on this Fund) has been the supply and demand ratio. The new issue
supply of the municipal market is about $140 billion, which is down
approximately $25 billion from last year. This lower supply, compounded with
continued demand from investors, has helped municipal bond prices to appreciate.
<TABLE>
<S> <C>
Q HOW DID YOU POSITION THE FUND IN RESPONSE TO THE EVENTS OF THE
PAST YEAR?
In seeking a combination of both yield and credit safety, the
A majority of the Fund's total assets are diversified among the
top four ratings
categories by Standard & Poor's Ratings Group (AAA, AA, A, BBB). For
credit safety, the Fund continues to hold a majority weighting in the
AAA-rating category (the highest credit rating assigned to municipal
bonds by Standard & Poor's Ratings Group).
</TABLE>
The top five sector holdings of this Fund's portfolio (as of September 30,
1995) are Water & Sewer, Health Care, Single Family Housing, Retail Utility, and
Multi-Family Housing. We feel those are the strongest sectors in Texas at the
present time.
A-14
<PAGE> 47
[PIE CHART]
PORTFOLIO COMPOSITION BY CREDIT QUALITY AS OF SEPTEMBER 30, 1995
<TABLE>
<S> <C>
Cash & Equivalents 2%
AAA 27%
AA 19%
A 19%
BAA 19%
BA 1%
Not Rated 21%
</TABLE>
Q HOW DID THE FUND PERFORM DURING THE FISCAL YEAR ENDED SEPTEMBER
30, 1995?
The Fund continues to provide investors with an attractive
A level of tax-free income. At its current annualized dividend
level of $0.54 per share, the Fund provides shareholders with a
tax-free distribution rate of 5.12 percent(3) (Class A shares) as of
September 30, 1995. At this distribution rate, the Fund provides
shareholders in the 36 percent federal income bracket with a yield
equivalent to a taxable investment earning 8.00 percent(4).
Overall, for the twelve months ended September 30, 1995, the Fund's one-year
annual return was 10.05 percent(1) (for Class A shares based on net asset
value). By comparison, The Lehman Brothers Municipal Bond Index earned a total
return of 11.18 percent over the same period. The Index is a broad-based
unmanaged index of municipal bonds and does not reflect any commissions or fees
that would be paid by an investor purchasing the securities it represents.
During part of the reporting period, Van Kampen American Capital Asset
Management, Inc., the Adviser, subsidized a portion of the Fund's expenses.
Without this subsidy, the total returns would have been lower. (Please refer to
the chart on page three for additional Fund performance).
Q WHAT IS YOUR OUTLOOK FOR THE MUNICIPAL MARKET IN GENERAL FOR
THE NEXT YEAR AND MORE SPECIFICALLY, FOR THE FUND?
We anticipate that the economy will grow modestly, and that
A inflation should stay low. As a result, we believe that
fixed-income markets- including municipal bonds-will continue to make
modest gains.
In the future, we may see interest rates drop slightly which, as we mentioned
previously, is good for investors already in the bond market because falling
interest rates cause the value of municipal bonds to rise.
A-15
<PAGE> 48
We see three key factors that may affect this market going forward. These are
the tax reform debates, the presidential election, and the strength of the
economy.
- Potential tax reform in some form is an issue we will watch in the
year ahead.
- With the presidential election in 1996, changes in the economic
climate may occur. We will continue to carefully monitor fixed-income
market conditions closely, and adjust the Fund's holdings accordingly.
- We feel that municipal bond supply may go down slightly, which would
be good news for investors because a decline in supply combined with
steady demand should help increase prices.
For now, we are comfortable with the Fund's positioning. However, we will pay
close attention to political and economic events and adjust the Fund's
management team, combined with our extensive research capabilities enables us to
seek the best bond values for investors -- balancing attractive yields with a
comfortable level of risk.
<TABLE>
<S> <C>
/s/ Peter W. Hegel /s/ Joseph A. Piraro
- -------------------------------- --------------------------------
Peter W. Hegel Joseph A. Piraro
Executive Vice President Portfolio Manager
Fixed Income Investments
</TABLE>
Please see footnotes on page __.
A-16
<PAGE> 49
TEXAS FUND SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE TEXAS FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the Municipal Fund
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor of the Municipal Fund
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the Municipal Fund
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Municipal Income Fund
Custodian of the Municipal Fund
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Municipal Income Fund
Legal Counsel of the Municipal Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors of the Municipal Fund
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 50
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
JULY 26, 1996
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION................... 3
A. SUMMARY........................................................... 3
The Reorganization.............................................. 3
Reasons for the Proposed Reorganization......................... 4
Comparison of the Municipal Fund and the Texas Fund............. 6
Capitalization.................................................. 13
Performance Information......................................... 14
B. RISK FACTORS...................................................... 15
Similarity of Risks............................................. 15
Differences in Risks............................................ 15
C. THE PROPOSED REORGANIZATION....................................... 17
Terms of the Agreement.......................................... 17
Description of Securities to be Issued.......................... 19
Continuation of Shareholder Accounts and Plans; Share
Certificates.................................................... 19
Federal Income Tax Consequences................................. 20
Expenses........................................................ 21
Ratification of Investment Objective, Policies and Restrictions
of the Municipal Fund......................................... 22
Legal Matters................................................... 22
D. RECOMMENDATION OF THE TEXAS BOARD................................. 23
OTHER INFORMATION........................................................ 23
A. SHAREHOLDERS OF THE TEXAS FUND, THE MUNICIPAL FUND AND VKAC....... 23
B. SHAREHOLDER PROPOSALS............................................. 24
VOTING INFORMATION AND REQUIREMENTS...................................... 24
EXHIBIT A: MANAGEMENT'S DISCUSSION OF PERFORMANCE........................ A-1
</TABLE>
------------------------------------------------------------------------------
-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 51
Information contained herein is subject to completion or amendment. A
post-effective amendment to the registration statement relating to these
securities has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be accepted prior to
the time the pre-effective amendment to the registration statement becomes
effective. This Statement of Additional Information does not constitute a
prospectus nor shall it constitute an offer to sell or the solicitation of
an offer to buy these securities.
SUBJECT TO COMPLETION--DATED JUNE 21, 1996
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
DATED JULY 26, 1996
---------------------
This Statement of Additional Information provides information about the Van
Kampen American Capital Municipal Income Fund (the "Municipal Fund"), an
open-end diversified management investment company, organized as a series of the
Van Kampen American Capital Tax Free Trust, a Delaware business trust ("Tax Free
Trust"), in addition to information contained in the Proxy Statement/Prospectus
of the Municipal Fund, dated July 26, 1996, which also serves as the proxy
statement of the Van Kampen American Capital Texas Tax Free Income Fund (the
"Texas Fund"), in connection with the issuance of Class A, B and C shares of the
Municipal Fund to shareholders of the Texas 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 Municipal Fund or Texas Fund located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181 (telephone No. (708) 684-6000
or (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the Texas Fund............................................. 2
Additional Information About the Municipal Fund and the Tax Free Trust................ 2
Additional Information About the Texas Fund........................................... 2
Financial Statements.................................................................. 2
</TABLE>
The Tax Free Trust 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> 52
PROPOSED REORGANIZATION OF THE TEXAS FUND
The shareholders of the Texas Fund are being asked to approve an
acquisition of all the assets of the Texas Fund solely in exchange for Class A,
B and C shares of the Municipal Fund and the Municipal Fund's assumption of the
liabilities of the Texas Fund (the "Reorganization") pursuant to an Agreement
and Plan of Reorganization by and between Van Kampen American Capital Tax Free
Trust, on behalf of the Municipal Fund, and the Texas Fund (the "Agreement"). A
copy of the form of the Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE MUNICIPAL FUND AND THE VKAC TAX FREE TRUST
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Municipal Fund, dated April 29, 1996, attached as
Appendix B to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE TEXAS FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Texas Fund, dated January 30, 1996, attached as
Appendix C to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Municipal Fund for the fiscal year ended
December 31, 1995, as included in Appendix B hereto, (ii) the audited financial
statements of the Texas Fund for fiscal year ended September 30, 1995, as
included in Appendix C hereto, and (iii) the unaudited financial statements of
the Texas Fund for the six months ended March 31, 1996, as Appendix D to this
Statement of Additional Information.
2
<PAGE> 53
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1996, by and between Van Kampen American Capital Tax Free Trust, a
Delaware business trust formed under the laws of the State of Delaware (the
"Trust") on behalf of its series, Van Kampen American Capital Municipal Income
Fund (the "Municipal Fund") and Van Kampen American Capital Texas Tax Free
Income Fund a business trust formed under the laws of the State of Delaware (the
"Texas Fund").
WITNESSETH:
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 the combined entity's 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 Texas Fund and the Municipal
Fund;
WHEREAS, the Texas Fund was organized as a corporation under the laws of
Maryland on September 6, 1991, and subsequently reorganized as a Delaware
business trust, pursuant to an Agreement and Declaration of Trust subsequently
amended and restated as of June 20, 1995, pursuant to which it is authorized to
issue an unlimited number of shares of beneficial interest which have a par
value equal to $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("Texas Adviser") provides investment
advisory and administrative services to the Texas Fund;
WHEREAS, the 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 May 10, 1995,
pursuant to which it is authorized to issue an unlimited number of shares of
A-1
<PAGE> 54
beneficial interest for each series authorized by the trustees, one of which
series is the Municipal 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.) ("Municipal Adviser") provides
investment advisory and administrative services to the Municipal Fund;
WHEREAS, the Board of Trustees of each of the Trust and the Texas Fund have
determined that entering into this Agreement for the Municipal Fund to acquire
the assets and liabilities of the Texas 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 TRANSACTLON.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth
in Sections 7 and 8 hereof, the Texas Fund will convey, transfer and deliver to
the Municipal Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the Texas 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 Municipal 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 Trust agrees that on the
Closing Date the Trust will (i) deliver to the Texas Fund, full and fractional
Class A, Class B and Class C Shares of beneficial interest of the Municipal Fund
having net asset values per share in an amount equal to the aggregate dollar
value of the Assets net of any liabilities of the Texas Fund described in
Section 3E hereof (the "Liabilities") determined pursuant to Section 3A of this
Agreement (collectively, the "Municipal Fund Shares") and (ii) assume all of the
Texas Fund's Liabilities. [The calculation of full and fractional Class A, Class
B and Class C Shares of beneficial interest of the Municipal Fund to be
exchanged shall be carried out to no less than two (2) decimal places.] All
Municipal Fund Shares delivered to the Texas Fund in exchange for such Assets
shall be delivered at net asset value without sales load, commission or other
transactional fee being imposed.
A-2
<PAGE> 55
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 Texas 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 Trust shall deliver to the Texas Fund the Municipal
Fund Shares in the amount determined pursuant to Section 1B hereof and the Texas
Fund thereafter shall, in order to effect the distribution of such shares to the
Texas Fund stockholders, instruct the Trust to register the pro rata interest in
the Municipal Fund Shares (in full and fractional shares) of each of the holders
of record of shares of the Texas 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 Trust agrees promptly to comply with
said instruction. The 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 Texas Fund to be
transferred and assumed, respectively, by the Municipal 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 Municipal Fund (collectively, the
"Trust Prospectus"), copies of which have been delivered to the Texas 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 Municipal Fund (the "Custodian")
for the benefit of the Municipal 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 Texas Fund.
C. FAILURE TO DELIVER SECURITIES. If the Texas Fund is unable to make delivery
pursuant to Section 3B hereof to the Custodian of any of the Texas Fund's
securities for the reason that any of such securities purchased by the Trust
have not yet been delivered to it by the Texas Fund's broker or brokers, then,
in lieu of such delivery, the Texas 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 Trust or Custodian, including brokers'
confirmation slips.
A-3
<PAGE> 56
D. SHAREHOLDER ACCOUNTS. The Trust, in order to assist the Texas Fund in the
distribution of the Municipal Fund Shares to the Texas Fund shareholders after
delivery of the Municipal Fund Shares to the Texas Fund, will establish pursuant
to the request of the Texas Fund an open account with the Municipal Fund for
each shareholder of the Texas Fund and, upon request by the Texas Fund, shall
transfer to such account the exact number of full and fractional Class A, Class
B and Class C shares of the Municipal Fund then held by the Texas Fund specified
in the instruction provided pursuant to Section 2 hereof. The Municipal Fund is
not required to issue certificates representing Municipal Fund Shares unless
requested to do so by a shareholder. Upon liquidation or dissolution of the
Texas Fund, certificates representing shares of beneficial interest stock of the
Texas Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Texas 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 Texas Fund 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 Trust's Registration Statement on Form N-14
(the "Registration Statement") and the solicitation of the Texas Fund
shareholder proxies; (ii) the Texas Fund 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 Municipal Adviser.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no event
later than one year after the Closing Date, the Texas 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 Texas Fund.
Immediately after the Closing Date, the stock transfer books relating to the
Texas Fund shall be closed and no transfer of shares shall thereafter be made on
such books.
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4. TEXAS FUND'S REPRESENTATIONS AND WARRANTIES.
The Texas Fund, hereby represents and warrants to the Trust, which
representations and warranties are true and correct on the date hereof, and
agrees with the Trust that:
A. ORGANIZATION. The Texas 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 Texas 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 Texas Fund. The Texas Fund has all material federal, state
and local authorizations 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 Texas Fund.
B. REGISTRATION. The Texas Fund is registered under the Investment Company Act
of 1940, as amended (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. The Texas 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 beneficial interest of the Texas Fund have been duly authorized and
are validly issued, fully paid and nonassessable 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 Texas Fund audited as of and for the year ended
September 30, 1995, true and complete copies of which have been heretofore
furnished to the Trust, fairly represent the financial condition and the results
of operations of the Texas 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 Texas Fund shall furnish to the 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 Texas
Fund for the period ended March 31, 1996; 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 Texas 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
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operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the Texas Fund
as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be, no
contingent Liabilities of the Texas Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the Texas Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Texas Fund which would, if adversely determined, materially affect
the Texas Fund's financial condition. All Liabilities were incurred by the Texas
Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Texas 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 Texas
Fund's Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the Texas Fund to which the Texas 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
Texas Fund, shall furnish the Municipal Fund with a statement of the earnings
and profits of the Texas Fund within the meaning of the Code as of the Closing
Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of the
Texas 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 material tax returns and reports of the Texas 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 Texas 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 Texas 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 Texas
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the Texas Fund, no other corporate acts or proceedings by the
Texas Fund are necessary to authorize this Agreement and the transactions
contemplated
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herein. This Agreement has been duly executed and delivered by the Texas Fund
and constitutes the legal, valid and binding obligation of Texas Fund
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Texas Fund does not and will not (i)
violate any provision of the Declaration of Trust or amendment or restatement
thereof of the Texas Fund, (ii) violate any statute, law, judgment, writ,
decree, order, regulation or rule of any court or governmental authority
applicable to the Texas 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 Texas Fund
is subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the Texas 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 Texas 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 Texas 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 Texas Fund, other than
changes in the ordinary course of its business, or any pending or threatened
litigation, which has had or may have a material adverse 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
Texas Fund granted by the Texas Fund to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Prospectus
for the Texas Fund;
(3) any entering into, amendment or termination of any contract or agreement
by Texas Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of business,
by the Texas Fund for borrowed money or any commitment to borrow money entered
into by the Texas Fund;
(5) any amendment of the Declaration of Trust of the Texas Fund; or
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(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 Texas Fund other than a lien for taxes
not yet due and payable.
M. TITLE. On the Closing Date, the Texas 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 deliver such Assets; upon delivery of such Assets, the
Municipal 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 Texas Fund's Proxy Statement, at the time of delivery
by the Texas Fund to its shareholders in connection with a special meeting of
shareholders to approve this transaction, and the Texas Fund's Prospectus and
Statement of Additional Information with respect to the Texas Fund on the forms
incorporated by reference into such Proxy Statement and as of their respective
dates (collectively, the "Texas Fund's Proxy Statement/Prospectus"), and at the
time the Registration Statement becomes effective, the Registration Statement
insofar as it relates to the Texas 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 Trust, Municipal Fund or their affiliates furnished to the Texas
Fund by the Trust.
O. BROKERS. There are no brokers or finders fees payable by the Texas Fund
Trust in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The Texas 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 Municipal Fund
and those to which the Assets are subject.
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R. TEXAS FUND LIABILITIES. Except as otherwise provided for herein, the Texas
Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the Texas Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
5. THE TRUST'S REPRESENTATIONS AND WARRANTIES.
The Trust, on behalf of the Municipal Fund, hereby represents and warrants to
the Texas Fund, which representations and warranties are true and correct on the
date hereof, and agrees with the Texas Fund that:
A. ORGANIZATION. The 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 Municipal Fund is a
separate series of the Trust duly designated in accordance with the applicable
provisions of the Declaration of Trust. The Trust and Municipal 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 Trust or Municipal Fund. The
Trust has all material federal, state and local authorizations necessary to
own on behalf of the Trust all of the properties and assets allocated to the
Municipal 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 Trust or Municipal Fund.
B. REGISTRATION. The Municipal Fund is registered under the 1940 Act as an
open-end, diversified management company and such registration has not been
revoked or rescinded. The 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 Municipal 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 Municipal Fund audited as of and for the year
ended December 31, 1995, true and complete copies of which have been
heretofore furnished to the Texas Fund fairly represent the financial
condition and the results of operations of the Municipal 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.
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D. FINANCIAL STATEMENTS. The Trust shall furnish to the Texas 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
Municipal Fund for the period ended [February 29, 1996], 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 Municipal 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 Municipal 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 Trust as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
Municipal Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Municipal Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Municipal
Fund which would, if adversely determined, materially affect the Municipal
Fund's financial condition.
F. MATERIAL AGREEMENTS. The Municipal 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 Trust Prospectus, there are no material agreements outstanding to which
the Municipal Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Municipal Fund required by law
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 Municipal 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 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 Trust's Board of Trustees, no other corporate
acts or proceedings by the Trust or Municipal Fund are necessary to authorize
this Agreement and the transactions contemplated herein. This Agreement has
been duly
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executed and delivered by the Trust and constitutes a valid and binding
obligation of the Trust enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar law affecting creditors'
rights generally, or by general principals of equity (regardless of whether
enforcement is sought in a proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Trust does not and will not (i) result in
a material violation of any provision of the Declaration of Trust of the Trust
or the Designation of Series of the Municipal 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 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 Trust pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the Trust is subject. Except as set forth in Schedule 3 to
this Agreement, (i) no consent, approval, authorization, order or filing with
notice to any court or governmental authority or agency is required for the
consummation by the 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 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 Municipal
Fund which would materially affect its financial condition.
K. SHARES OF THE MUNICIPAL FUND: REGISTRATION. The Municipal 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 MUNICIPAL FUND: AUTHORIZATION. Subject to the matters set
forth in the Statement of Additional Information of the Municipal Fund, under
the heading "The Fund and the Trust", a copy of which has been furnished to
the Texas Fund, the shares of beneficial interest of the Municipal 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 Trust and conform in all material respects to the
description thereof contained in the Trust's Prospectus furnished to the Texas
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
Municipal Fund, other than changes in the ordinary course of its business,
which has had a
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material adverse effect on such business, results of operations, assets or
financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein as of the effective date of the Registration Statement, and
at all times subsequent thereto up to 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 Texas Fund furnished to the
Trust by the Texas Fund.
O. TAX QUALIFICATION. The Municipal 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 Municipal 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 Municipal
Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Texas Fund and Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Texas 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 Texas Fund and Trust shall file all
reports required to be filed by the Texas Fund and Trust with the SEC between
the date of this Agreement and 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 Texas
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Fund and the 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
Texas Fund's Proxy Statement/Prospectus, each party hereto will cooperate with
the other and furnish to the other the information relating to the Texas Fund,
Trust or Municipal 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 Texas Fund shall promptly
prepare and file with the SEC the Proxy Statement/Prospectus and the 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 Texas
Fund and its affiliated persons, Trust shall only include such information as
is approved by the Texas Fund for use in the Registration Statement. The Trust
shall not amend or supplement any such information regarding the Trust and
such affiliates without the prior written consent of the Texas Fund which
consent shall not be unreasonably withheld or delayed. The Trust shall
promptly notify and provide the Texas Fund with copies of all amendments or
supplements filed with respect to the Registration Statement. The 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 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 Trust's shares of beneficial interest in the transactions
contemplated by this Agreement, and the Texas Fund shall furnish all
information concerning the Texas Fund and the holders of the Texas Fund's
shares of beneficial interest as may be reasonably requested in connection
with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Texas Fund shall make available to the 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 Texas Fund). During the period prior to the Closing Date, the
Trust shall make available to the Texas 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
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(other than Documents which such party is not permitted to disclose under
applicable law or which are not relevant to the Municipal Fund).
E. SHAREHOLDERS MEETING. The Texas Fund shall call a meeting of the Texas
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 Texas Fund as of the record date for such
meeting of shareholders. The Texas Fund's Board of Trustees shall recommend to
the Texas Fund shareholders approval of this Agreement and the transactions
contemplated herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Texas Fund and Trust covenant and agree
to coordinate the respective portfolios of the Texas Fund and Municipal 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 Municipal Fund's portfolio,
the resulting portfolio will meet the Municipal Fund's investment objective,
policies and restrictions, as set forth in the Municipal Fund's Prospectus, a
copy of which has been delivered to the Texas Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Texas Fund covenants that it
shall cause to be distributed the Municipal Fund Shares in the proper pro rata
amount for the benefit of Texas Fund's shareholders and such that the Texas
Fund shall not continue to hold amounts of said shares so as to cause a
violation of Section 12(d)(1) of the 1940 Act. The Texas Fund covenants
further that, pursuant to Section 3G, it shall liquidate and dissolve as
promptly as practicable after the Closing Date. The Texas Fund covenants to
use all reasonable efforts to cooperate with the Trust and the 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 Texas Fund and the 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 the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
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J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Texas Fund and the 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 Trust, the Municipal Fund nor the Texas 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 Trust, the Municipal Fund and the Texas Fund will take
such action, or cause such action to be taken, as is reasonably necessary to
enable Skadden, Arps, Slate, Meagher & Flom, counsel to the Texas Fund, to
render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the
Texas Fund shall declare and pay to its stockholders a dividend or other
distribution 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 TEXAS FUND.
The obligations of the Texas Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
Texas 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 beneficial interest the Texas 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 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 Municipal Fund, and the Texas
Fund shall have received a certificate of the President or Vice President of
the Trust satisfactory
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in form and substance to the Texas Fund so stating. The 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 effect on business operations of the Municipal Fund.
F. TAX OPINION. The Texas Fund shall have obtained an opinion from Skadden,
Arps, Slate, Meagher & Flom, counsel for the Texas Fund, dated as of the
Closing Date, addressed to the Texas 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 Code, substantially in
the form attached as Annex A.
G. OPINION OF COUNSEL. The Texas Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Trust, dated as of the
Closing Date, addressed to the Texas Fund substantially in the form and to the
effect that: (i) the 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 Trust has duly designated the Municipal Fund as a series of the Trust
pursuant to the terms of the Declaration of Trust of the Trust; (iii) the
Municipal Fund is registered as an open-end, diversified management company
under 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 Trust and this Agreement has been duly
executed and delivered by the Trust and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Trust; (v) neither the execution or delivery by the Trust of
this Agreement nor the consummation by
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the Trust or Municipal Fund of the transactions contemplated thereby
contravene the 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 it by the Trust as being applicable to the
Trust or the Municipal Fund; (vi) to the best of their knowledge based solely
on the certificate of an appropriate officer of the 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 Municipal Fund or
might have a material adverse effect on the value of any assets of the
Municipal Fund; (vii) the Municipal 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 nonassessable; (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 Trust and the Municipal 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
SEC 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 Trust and Municipal 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 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). 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 Texas Fund
of any material benefit under the Agreement; or (c) which can be readily
obtained without significant delay or expense to the Texas Fund, without loss
to the Texas Fund of any material benefit under the Agreement and without any
material adverse effect on the Texas Fund 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
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filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States which, in counsel's 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 Trust in connection with the opinion. In addition,
although counsel need not specifically considered the possible applicability
to the Trust of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the Trust and the
Municipal Fund 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 Texas Fund shall have received a certificate of
an authorized officer of the 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 Texas Fund.
8. CONDITIONS TO OBLIGATIONS OF TRUST.
The obligations of the Trust hereunder with respect to the consummation of the
Reorganization are subject to the satisfaction, or written waiver by the 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 Texas 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 Texas Fund 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 Texas Fund since [July
26, 1996] and the Trust shall have received a certificate of the Chairman or
President of the Texas Fund satisfactory in form and substance to the Trust so
stating. The Texas 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.
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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 Trust and the Municipal Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom, counsel for the Texas Fund,
dated as of the Closing Date, addressed to the Trust and Municipal 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
Code substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The Trust and Municipal Fund shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the Texas Fund,
dated as of the Closing Date, addressed to the Trust and Municipal Fund,
substantially in the form and to the effect that: (i) the Texas Fund is duly
formed and existing as a trust under the laws of the State of Delaware; (ii)
the Texas Fund is registered as an open-end, diversified management company
under the 1940 Act; (iii) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized by all
necessary trust action of the Texas Fund and this Agreement has been duly
executed and delivered by the Texas Fund and (assuming the Agreement is a
valid and binding obligation of the other parties thereto) is a valid and
binding obligation of the Texas Fund (iv) neither the execution or delivery by
the Texas Fund of this Agreement nor the consummation by the Texas Fund of the
transactions contemplated thereby contravene the Texas Fund's Declaration of
Trust or, to their knowledge, violate any provision of any statute, or any
published regulation or any judgment or order disclosed to them by the Texas
Fund as being applicable to the Texas Fund; (v) to their knowledge based
solely on the certificate of an appropriate officer of the Texas Fund attached
thereto, there is no pending, or threatened litigation involving the Texas
Fund except as disclosed therein (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 10b5 type opinions as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the Texas Fund and the Texas 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
SEC 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
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Statement applicable to the Texas 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 their knowledge and subject to the qualifications set
forth below, the execution and delivery by the Texas Fund 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 Trust or
Municipal Fund of any material benefit under such agreements; or (c) which can
be readily obtained without significant delay or expense to the Trust or
Municipal Fund, without loss to the Trust or Municipal 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
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States 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 them by the Texas Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the Texas Fund of any other laws, orders or judgments,
nothing has come to their attention in connection with their representation of
the Texas Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order or
filing is required.
H. 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 Municipal Fund's
investment objectives, policies and restrictions as set forth in the Trust
Prospectus, a copy of which has been delivered to the Texas Fund.
I. SHAREHOLDER LIST. The Texas Fund shall have delivered to the Trust an
updated list of all shareholders of the Texas Fund, as reported by the Texas
Fund's transfer agent, as of one (1) business day prior to the Closing Date
with
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each shareholder's respective holdings in the Texas Fund, taxpayer
identification numbers, Form W9 and last known address.
J. OFFICER CERTIFICATES. The Trust shall have received a certificate of an
authorized officer of the Texas 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 Trustees and shareholders shall be furnished to the
Trust.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Trustees, amend this Agreement at any time before or after
approval thereof by the shareholders of the Texas Fund; provided, however, that
after receipt of Texas 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 Texas 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 Texas Fund and
the Trust;
(ii) by the Texas Fund, if the Trust breaches in any material respect any of
its representations, warranties, covenants or agreements contained in this
Agreement;
(iii) by the Trust, if the Texas Fund breaches in any material respect any
of its representations, warranties, covenants or agreements contained in this
Agreement;
(iv) by either the Texas Fund or Trust, if the Closing has not occurred on
or prior to [September 30, 1996] (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);
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(v) by the Trust in the event that: (a) all the conditions precedent to the
Texas 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
Trust gives the Texas Fund written assurance of its intent to close
irrespective of the satisfaction or nonsatisfaction of all conditions
precedent to the Trust's obligation to close, as set forth in Section 8 of
this Agreement; and (c) the Texas Fund then fails or refuses to close within
the earlier of five (5) business days or [September 30, 1996]; or
(vi) by the Texas Fund in the event that: (a) all the conditions precedent
to the 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 Texas Fund gives the Trust written assurance of its intent
to close irrespective of the satisfaction or nonsatisfaction of all the
conditions precedent to the Texas Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the Trust then fails or refuses to close
within the earlier of five (5) business days or [September 30, 1996].
10. REMEDIES.
In the event of termination of this Agreement by either or both of the Texas
Fund and 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 Trust's and the Texas 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 Trust or the Texas Fund be
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obligated to indemnify the other if indemnity is not sought within ninety (90)
days of the expiration of the applicable Survival Period.
B. INDEMNIFICATION. 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 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 Indemnified Party 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 Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "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.
C. 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 give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
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 prior written
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
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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 Texas Fund shall be addressed to the Texas
Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post Oak
Boulevard, Houston, TX 77056; Attention: General Counsel, or at such other
address as the Texas Fund may designate by written notice to the Trust. Notice
to the Trust shall be addressed to the 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 Trust may designate by written notice to the Texas
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 party hereto.
15. BOOKS AND RECORDS.
The Texas Fund and the Trust agree that copies of the books and records of the
Texas 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 Texas Fund to the Trust at the Closing
Date. In addition to, and without limiting the foregoing, the Texas Fund and the
Trust agree to take such action as may be necessary in order that the 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, 1993, December 31, 1994 and December 31, 1995;
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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<PAGE> 77
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 Texas Fund and
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 Trust and Texas 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 Trust and the Texas 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
Trust, Municipal Fund or Texas Fund individually but binding only upon the
assets and property of the Municipal Fund or the Texas Fund the case may be.
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<PAGE> 78
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.
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND,
a Delaware business trust
By: ______________________________________
Title: ___________________________________
Attest: ___________________________________
Title: ____________________________________
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST,
a Delaware business trust
By: ______________________________________
Title: ___________________________________
Attest: ___________________________________
Title: ____________________________________
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<PAGE> 79
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
Dated April 29, 1996
<PAGE> 80
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
Van Kampen American Capital Municipal Income Fund, formerly known as Van
Kampen Merritt Municipal Income Fund (the "Fund"), seeks to provide high current
income exempt from federal income taxes consistent with preservation of capital.
The Fund attempts to achieve its investment objective by investing at least 80%
of its assets in a diversified portfolio of tax-exempt municipal securities
rated investment grade at the time of investment. There is no assurance that the
Fund will achieve its investment objective. The Fund is a separate series of Van
Kampen American Capital Tax Free Trust, a Delaware business trust (the
"Trust").
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 29, 1996 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Description of Municipal Securities Ratings........................................... B-13
Trustees and Officers................................................................. B-18
Investment Advisory and Other Services................................................ B-25
Portfolio Transactions and Brokerage Allocation....................................... B-27
Tax Status of the Fund................................................................ B-28
The Distributor....................................................................... B-28
Legal Counsel......................................................................... B-29
Performance Information............................................................... B-30
Independent Auditors' Report.......................................................... B-33
Financial Statements.................................................................. B-34
Notes to Financial Statements......................................................... B-53
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 81
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end diversified management
investment company. At present, the Fund, Van Kampen American Capital Insured
Tax Free Income Fund, Van Kampen American Capital Tax Free High Income Fund, Van
Kampen American Capital California Insured Tax Free Fund, Van Kampen American
Capital Intermediate Term Municipal Income Fund, Van Kampen American Capital
Florida Insured Tax Free Income Fund, Van Kampen American Capital New Jersey Tax
Free Income Fund and Van Kampen American Capital New York Tax Free Income Fund
have been organized as series of the Trust and have commenced investment
operations. Van Kampen American Capital California Tax Free Income Fund, Van
Kampen American Capital Michigan Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax
Free Income Fund have been organized as series of the Trust but have not yet
commenced investment operations. Other series may be organized and offered in
the future.
The Trust is an unincorporated business trust established under the laws of
the state of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995, (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. Each share
represents an equal proportionate interest in the assets of the series with each
other share in such series and no interest in any other series. No series is
subject to the liabilities of any other series. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability. The Fund was originally organized as a
sub-trust of a Massachusetts business trust by a Declaration of Trust dated
August 15, 1985, under the name of Van Kampen Merritt Municipal Income Fund. The
Fund was reorganized as a series of the Trust and adopted its present name as of
July 31, 1995.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (taken at current market value) would then be invested
in securities of a single
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issuer or, if, as a result, the Fund would hold more than 10% of the
outstanding voting securities of an issuer.
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions as described in the
Prospectus.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging or risk
management transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax-exempt investment companies that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax-exempt investment company or securities of any tax-exempt
investment company aggregating in value more than 5% of the total assets
of the Fund.
10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding
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shares are present in person or by proxy. As long as the percentage restrictions
described above are satisfied at the time of the investment or borrowing, the
Fund will be considered to have abided by those restrictions even if, at a later
time, a change in values or net assets causes an increase or decrease in
percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were one year or less are excluded from such calculation. The Fund anticipates
that its annual portfolio turnover rate will normally be less than 100%.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which are often called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax-exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
bonds are "general obligation" and "revenue" or "special obligation" bonds,
which include "industrial revenue bonds." General obligation bonds are secured
by the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special tax or other specific revenue
source such as from the user of the facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
of entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent
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participations in a lease, an installment purchase contract, or a conditional
sales contract. Some municipal leases and participation certificates may not be
readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals. There generally is no secondary market for
these notes, although they are redeemable at face value. Each note purchase by
the Fund will meet the criteria established for the purchase of municipal
securities.
The Fund also may invest up to 15% of its total assets in variable rate
derivative municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest. Such variable rate
derivative municipal securities may pay a rate of interest determined by
applying a multiple to the variable rate. The extent of increases and decreases
in the value of derivative municipal securities whose rates vary inversely with
changes in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
Although the Fund will invest at least 80% of its assets in municipal
securities rated investment grade at the time of investment, municipal
securities, like other debt obligations, are subject to the risk of non-payment.
The ability of issuers of municipal securities to make timely payments of
interest and principal may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value of
the municipal security experiencing non-payment and a potential decrease in the
net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal securities and the Fund
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in the
payment of interest or repayment of principal, or both, the Fund may take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), may limit the extent to
which the Fund may exercise its rights by taking possession of such assets,
because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
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institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. The Fund may, from time to time,
adopt a more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
HIGH YIELD MUNICIPAL SECURITIES
In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade tax-exempt municipal securities and up to 20% of
the Fund's total assets may be invested in lower grade tax-exempt municipal
securities. The amount of available information about the financial condition of
municipal securities issuers is generally less extensive than that for corporate
issuers with publicly traded securities and the market for tax-exempt municipal
securities is considered to be generally less liquid than the market for
corporate debt obligations. Liquidity relates to the ability of a Fund to sell a
security in a timely manner at a price which reflects the value of that
security. As discussed below, the market for lower grade tax-exempt municipal
securities is considered generally to be less liquid than the market for
investment grade tax-exempt municipal securities. Further, municipal securities
in which the Fund may invest include special obligation bonds, lease
obligations, participation certificates and variable rate instruments. The
market for such securities may be particularly less liquid. The relative
illiquidity of some of the Fund's portfolio securities may adversely affect the
ability of the Fund to dispose of such securities in a timely manner and at a
price which reflects the value of such security in the Adviser's judgment.
Although the issuer of some such municipal securities may be obligated to redeem
such securities at face value, such redemption could result in capital losses to
the Fund to the extent that such municipal securities were purchased by the Fund
at a premium to face value. The market for less liquid securities tends to be
more volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.
The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the Fund's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
fixed income securities can be expected to decline. Net asset value and market
value may be volatile due to the Fund's investment in lower grade and less
liquid municipal securities. Volatility may be greater during periods of general
economic uncertainty.
The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.
Lower grade tax-exempt municipal securities generally involve greater credit
risk than higher grade municipal securities. A general economic downturn or a
significant increase in interest rates could severely disrupt the market for
lower grade tax-exempt municipal securities and adversely affect the market
value of such securities. In addition, in such circumstances, the ability of
issuers of lower grade tax-exempt municipal securities to repay principal and to
pay interest, to meet projected financial goals and to obtain additional
financing may be adversely affected. Such consequences could lead to an
increased incidence of default for
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such securities and adversely affect the value of the lower grade tax-exempt
municipal securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade tax-exempt municipal
securities are less sensitive to changes in interest rates than are those for
higher rated tax-exempt municipal securities, but are more sensitive to adverse
economic changes or individual issuer developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of lower grade tax-exempt municipal securities.
Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade tax-exempt municipal securities in the Fund's portfolio and thus in
the net asset value of the Fund. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid municipal
securities. Volatility may be greater during periods of general economic
uncertainty. The Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of interest or a repayment of
principal on its portfolio holdings, and the Fund may be unable to obtain full
recovery thereof. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional capital with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Recent and proposed legislation may have an adverse impact on
the market for lower grade tax-exempt municipal securities. Recent legislation
requires federally-insured savings and loan associations to divest their
investments in lower grade bonds. Other legislation has been proposed which, if
enacted, could have an adverse impact on the market for lower grade tax-exempt
municipal securities.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating tax-exempt municipal securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
the Adviser continuously monitors the issuers of tax-exempt municipal securities
held in the Fund's portfolio. The Fund may, if deemed appropriate by the
Adviser, retain a security whose rating has been downgraded below B- by S&P or
below B3 by Moody's, or whose rating has been withdrawn.
Because issuers of lower grade tax-exempt municipal securities frequently
choose not to seek a rating of their municipal securities, the Adviser will be
required to determine the relative investment quality of many of the municipal
securities in the Fund's portfolio. Further, because the Fund may invest up to
20% of its total assets in these lower grade municipal securities, achievement
by the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in higher grade municipal securities. The relative lack of financial
information available with respect to issuers of municipal securities may
adversely affect the Adviser's ability to successfully conduct the required
investment analysis.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called
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"Strategic Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options
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("OTC options"). Exchange listed options are issued by a regulated intermediary
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options. The discussion
below uses the OCC as a paradigm, but is also applicable to other financial
intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
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If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
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OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap
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market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OCC issued and
exchange listed options sold by the Fund other than those above generally settle
with physical delivery, and the Fund will segregate an amount of assets equal to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
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DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
</TABLE>
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<TABLE>
<S> <C>
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major categories.
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgement with respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flows.
</TABLE>
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NR Indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of
policy.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS
TERRITORIES are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and
related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics are a plus (+)
designation. SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from 'A-1' for
the highest-quality obligations to 'D' for the lowest. These categories are
as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with
a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
high as for issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated 'B' are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless S&P believes that such payments will be made during such
grace period.
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A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
</TABLE>
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<TABLE>
<S> <C>
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes the probable credit stature upon completion of
construction or elimination of the basis of the condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
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Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc. (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital" or "VKAC") or VK/AC
Holding, Inc. For purposes hereof, the term "Van Kampen American Capital Funds"
includes each of the open-end investment companies advised by the VK Adviser
(excluding The Explorer Institutional Trust) and each of the open-end investment
companies advised by the AC Adviser (excluding the American Capital Exchange
Fund and the Common Sense Trust).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Date of Birth: 07/14/32
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndston, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. A Trustee of each of the Van
Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Date of Birth: 11/23/19
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 Du Pont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Executive Vice President and a
Date of Birth: 06/20/42 Director of VK/AC Holding, Inc. and Van Kampen American
Capital. Chief Executive Officer of McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. Executive Vice President and a Trustee of
each of the Van Kampen American Capital Funds. President
of the closed-end investment companies advised by the VK
Adviser. Prior to December, 1991, Senior Vice President
of Van Kampen Merritt Inc.
</TABLE>
B-18
<PAGE> 98
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Date of Birth: 03/31/20 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Date of Birth: 02/13/36 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Date of Birth: 10/19/39 Distributor, the VK Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc. and Van Kampen American
Capital Advisors, Inc. Chairman, President and a Director
of Van Kampen American Capital Exchange Corporation,
American Capital Contractual Services, Inc. and American
Capital Shareholders Corporation. Chairman and a Director
of ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen
Merritt Equity Advisors Corp., Van Kampen Merritt Equity
Holdings Corp., and VCJ Inc., McCarthy, Crisanti &
Maffei, Inc., McCarthy, Crisanti & Maffei Acquisition,
and Van Kampen American Capital Trust Company. Chairman,
President and a Director of Van Kampen American Capital
Services, Inc. President, Chief Executive Officer and a
Trustee of each of the Van Kampen American Capital Funds.
Director, Trustee or Managing General Partner of other
open-end investment companies and closed-end investment
companies advised by the VK Adviser or the AC Adviser.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Date of Birth:10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Date of Birth: 08/02/24 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to the Van Kampen American Capital
Chicago, IL 60606 Funds. A Trustee of each of the Van Kampen American
Date of Birth: 08/22/39 Capital Funds. He also is a Trustee of The Explorer Trust
and closed-end investment companies advised by the VK
Adviser.
</TABLE>
B-19
<PAGE> 99
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Date of Birth: 01/31/22 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Whalen is an interested person of the Fund by reason of his firm having acted
as legal counsel to the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of VKAC and have
entered into employment contracts (for a term of five years) with VKAC.
The Fund's Officers other than Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso,
Martin, Wetherell and Hill are located at 2800 Post Oak Blvd., Houston, TX
77056. Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and
Hill are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
William N. Brown........ Vice President Executive Vice President of the VK Adviser,
Date of Birth: AC Adviser, VK/AC Holding, Inc., VKAC, Van
05/26/53 Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, ACCESS Investor Services,
Inc., and Van Kampen American Capital Trust
Company. Director of American Capital
Shareholders Corporation. Vice President of
each of the Van Kampen American Capital
Funds.
Peter W. Hegel.......... Vice President Executive Vice President of the VK Adviser,
Date of Birth: AC Adviser, Van Kampen American Capital
06/25/56 Advisors, Inc. Director of McCarthy,
Crisanti & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition Corporation.
Vice President of each of the Van Kampen
American Capital Funds. Vice President of
the closed-end funds advised by the VK
Adviser.
Curtis W. Morell........ Vice President and Vice President and Chief Accounting Officer
Date of Birth: Chief Accounting of each of the Van Kampen American Capital
08/04/46 Officer Funds. Vice President and Treasurer of
other investment companies advised by the
AC Adviser.
</TABLE>
B-20
<PAGE> 100
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg........ Vice President and Executive Vice President, General Counsel
Date of Birth: Secretary and Secretary of Van Kampen American
07/29/53 Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor. Executive Vice
President and General Counsel of the VK
Adviser and the AC Adviser, Van Kampen
American Capital Management, Inc., VSM Inc.
VCJ, Inc., Van Kampen Merritt Equity
Advisors Corp., and Van Kampen Merritt
Equity Holdings Corp. Executive Vice
President, General Counsel and Assistant
Secretary of Van Kampen American Capital
Advisors, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation,
ACCESS Investor Services, Inc., American
Capital Shareholders Corporation, and Van
Kampen American Capital Trust Company.
General Counsel of McCarthy, Crisanti &
Maffei, Inc. and McCarthy, Crisanti &
Maffei Acquisition Corp. Vice President and
Secretary of each of the Van Kampen
American Capital Funds. Secretary of the
closed-end funds advised by the VK Adviser.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute.
Robert C. Peck, Jr...... Vice President Executive Vice President of the VK Adviser.
Date of Birth: Executive Vice President and Director of
10/01/46 the AC Adviser. Vice President of each of
the Van Kampen American Capital Funds.
Alan T. Sachtleben...... Vice President Executive Vice President of the VK Adviser.
Date of Birth: Executive Vice President and a Director of
04/20/42 the AC Adviser. Vice President of each of
the Van Kampen American Capital Funds.
Paul R. Wolkenberg...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and the AC Adviser. President, Chief
11/10/44 Executive Officer and a Director of Van
Kampen American Capital Trust Company and
ACCESS. Vice President of each of the Van
Kampen American Capital Funds.
Edward C. Wood III...... Vice President and Senior Vice President of VK Adviser and the
Date of Birth: Chief Financial Officer AC Adviser. Vice President and Chief
01/11/56 Financial Officer of each of the Van Kampen
American Capital Funds. Vice President,
Treasurer and Chief Financial Officer of
the closed-end funds advised by VK Adviser.
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: AC Adviser. Treasurer of each of the Van
08/20/55 Kampen American Capital Funds. Controller
of the closed-end funds advised by the VK
Adviser. Formerly Controller of open-end
funds advised by VK Adviser.
</TABLE>
B-21
<PAGE> 101
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Tanya M. Loden.......... Controller Controller of each of the Van Kampen
Date of Birth: American Capital Funds. Vice President and
11/19/59 Controller of other investment companies
advised by the AC Adviser. Formerly Tax
Manager/Assistant Controller of investment
companies advised by the AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of VKAC. Assistant Vice President
03/01/65 and Assistant Secretary of the Distributor,
the VK Adviser, the AC Adviser, and Van
Kampen American Capital Management, Inc.
Assistant Vice President of Van Kampen
American Capital Advisors, Inc. Assistant
Secretary of each of the Van Kampen
American Capital Funds. Assistant Secretary
of the closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of VKAC. Assistant Vice President
11/15/63 and Assistant Secretary of the Distributor,
the VK Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, ACCESS, and American Capital
Shareholders Corporation. Assistant
Secretary of each of the Van Kampen
American Capital Funds.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of VKAC.
08/20/56 Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser and the Distributor, Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Advisers, Inc.,
VSM Inc., VCJ Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation,
ACCESS Investor Services, Inc., Van Kampen
Merritt Equity Advisors Corp., Van Kampen
Merritt Equity Holdings Corp., American
Capital Shareholders Corporation. Secretary
and Deputy General Counsel of McCarthy,
Crisanti, & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition. Chief Legal
Officer of McCarthy, Crisanti & Maffei,
S.A. Assistant Secretary of each of the Van
Kampen American Capital Funds. Assistant
Secretary of the closed-end funds advised
by the VK Adviser.
</TABLE>
B-22
<PAGE> 102
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Weston B. Wetherell..... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: and Assistant Secretary of VKAC, the VK
06/15/56 Adviser, the AC Adviser and the
Distributor, Van Kampen American Capital
Management, Inc. and Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds. Assistant Secretary of closed-end
funds advised by VK Adviser.
Steven M. Hill.......... Assistant Treasurer Assistant Vice President of the VK Adviser
Date of Birth: and AC Adviser. Assistant Treasurer of each
10/16/64 of the Van Kampen American Capital Funds.
Assistant Treasurer of the closed-end funds
advised by the VK Adviser.
Robert Sullivan......... Assistant Controller Assistant Controller of each of the Van
Date of Birth: Kampen American Capital Funds.
03/30/33
</TABLE>
Each of the foregoing trustees and officers holds the same position with each
of 46 other Van Kampen American Capital mutual funds (the "Fund Complex"). Each
trustee who is not an affiliated person of the VK Adviser and the AC Adviser,
the Distributor or VKAC (each a "Non-Affiliated Trustee") is compensated by an
annual retainer and meeting fees for services to the funds in the Fund Complex.
Each fund in the Fund Complex provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees to defer receipt of his or her
compensation and earn a return on such deferred amounts based upon the return of
the common shares of the funds in the Fund Complex as more fully described
below.
The compensation of each Non-Affiliated Trustee includes a retainer from the
Fund in an amount equal to $2,500 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per regular quarterly meeting attended by the Non-Affiliated Trustee, due
on the date of such meeting, plus reasonable expenses incurred by the
Non-Affiliated Trustee in connection with his or her services as a trustee. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
The trustees have approved an aggregate compensation cap with respect to the
Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding any
retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of mutual funds in the Fund Complex as
of July 21, 1995 and certain other exceptions. In addition, the Adviser has
agreed to reimburse each fund in the Fund Complex through December 31, 1996 for
any increase in the trustee's aggregate compensation over the aggregate
compensation paid by such fund in its 1994 fiscal year, provided that if a fund
did not exist for the entire 1994 fiscal year appropriate adjustments will be
made.
Each Non-Affiliated Trustee can elect to defer receipt of all or a portion of
the compensation earned by such Non-Affiliated Trustee until retirement. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to the return on common shares of the Fund or other mutual funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund will invest in securities of those
mutual funds selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The deferred compensation plan is not funded
and obligations thereunder represent general unsecured claims against the
general assets of each Fund.
Under the Fund's retirement plan, a Non-Affiliated Trustee who is receiving
trustee's fees from the Fund prior to such Non-Affiliated Trustee's retirement,
has at least ten years of service and retires at or after attaining the age of
60, is eligible to receive a retirement benefit from the Fund equal to $2,500
per year for each of the ten years following such trustee's retirement. Under
certain conditions, reduced benefits are available for early retirement provided
the trustee has served at least five years. As of the date hereof, the
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
B-23
<PAGE> 103
Additional information regarding compensation before deferral from the Fund
and the other funds in the Fund Complex is set forth in the table below.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR BEFORE
RETIREMENT DEFERRAL FROM
AGGREGATE BENEFITS ESTIMATED REGISTRANT
COMPENSATION ACCRUED AS ANNUAL AND FUND
BEFORE DEFERRAL PART OF BENEFITS COMPLEX PAID
FROM REGISTRANT UPON TO
NAME(2) REGISTRANT(3) EXPENSES(4) RETIREMENT(5) TRUSTEES(6)
- --------------------------------------------- ----------------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
J. Miles Branagan............................ $ 9,500 $ -0- $ 18,000 $84,250
Dr. Richard E. Caruso........................ 4,750 -0- -0- 57,250
Philip P. Gaughan............................ 18,225 10,941 6,750 76,500
Linda Hutton Heagy........................... 9,500 -0- 20,000 38,417
Dr. Roger Hilsman............................ 9,500 -0- -0- 91,250
R. Craig Kennedy............................. 21,225 520 20,000 92,625
Donald C. Miller............................. 21,225 13,721 9,000 94,625
Jack E. Nelson............................... 21,225 5,785 20,000 93,625
David Rees................................... 9,500 -0- -0- 83,250
Jerome L. Robinson........................... 21,230 9,694 5,000 89,375
Lawrence J. Sheehan.......................... 9,500 -0- -0- 91,250
Dr. Fernando Sisto........................... 9,500 -0- 10,000 98,750
Wayne W. Whalen.............................. 21,125 3,415 20,000 93,375
William S. Woodside.......................... 8,500 -0- -0- 79,125
</TABLE>
- ---------------
(1) The "Registrant" is the Trust, which currently consists of eight operating
series. As indicated in the other explanatory notes, the amounts in the
table relate to the applicable trustees during the Registrant's last fiscal
year ended December 31, 1995 or the Fund Complex' last calendar year ended
December 31, 1995.
(2) Messrs. Powell and McDonnell, trustees of the Trust, are affiliated persons
of the VK Adviser, the AC Adviser and the Distributor and are not eligible
for compensation or retirement benefits from the Registrant. Messrs.
Branagan, Caruso, Hilsman, Powell, Rees, Sheehan, Sisto and Woodside were
elected by shareholders to the Board of Trustees on July 21, 1995. Ms. Heagy
was appointed to the Board of Trustees on September 7, 1995. Mr. Gaughan
retired from the Board of Trustees on January 26, 1996. Messrs. Caruso, Rees
and Sheehan were removed from the Board of Trustees effective September 7,
1995, January 29, 1996 and January 29, 1996, respectively.
(3) The amounts shown in this column represent the sum of the Aggregate
Compensation before Deferral with respect to each series in operation during
the Registrant's fiscal year ended December 31, 1995. The following trustees
deferred compensation from the Trust during the fiscal year ended December
31, 1995: Mr. Gaughan, $18,225; Mr. Kennedy, $21,225; Mr. Miller, $21,225;
Mr. Nelson, $21,225; Mr. Robinson, $21,230; and Mr. Whalen, $21,125. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to the return on the common shares of the Fund or other mutual
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee. To the extent permitted by the 1940 Act, its is anticipated that
the Fund will invest in securities of those mutual funds selected by the
Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee from the Trust as of December 31, 1995
is as follows: Mr. Gaughan, $18,930; Mr. Kennedy, $30,923; Mr. Miller,
$30,019; Mr. Nelson, $30,923; Mr. Robinson, $30,255; and Mr. Whalen,
$23,150. The deferred compensation plan is described above the Compensation
Table.
(4) The amounts shown in this column represent the sum of the Retirement
Benefits accrued by each series in operation during the Registrant's fiscal
year ended December 31, 1995. Retirement Benefits were not accrued for those
trustees elected or appointed during the Registrant's fiscal year ended
December 31, 1995 because such trustees were ineligible for retirement
benefits or such amounts are considered immaterial for the Registrant's
fiscal year ended December 31, 1995. The retirement plan is described above
the Compensation Table.
(5) The amounts shown in this column are the Estimated Annual Benefits payable
per year for the 10-year period commencing in the year of such trustee's
retirement from the Registrant (based on $2,500 per series for each series
of the Registrant in operation) assuming: the trustee has 10 or more years
of service
B-24
<PAGE> 104
on the Board of the respective series and retires at or after attaining the age
of 60. Trustees retiring prior to the age of 60 or with fewer than 10 years but
more than five years of service may receive reduced retirement benefits from a
series. The actual annual benefit may be less if the trustee is subject to
the Fund Complex retirement benefit cap.
(6) The amounts shown in this column represent the sum of the Aggregate
Compensation before Deferral with respect to each of the 46 mutual funds in
the Fund Complex as of December 31, 1995. The following trustees deferred
compensation from the Fund Complex (including the Registrant) during the
calendar year ended December 31, 1995 as follows: Dr. Caruso, $41,750; Mr.
Gaughan, $57,750; Ms. Heagy, $8,750; Mr. Kennedy, $65,875; Mr. Miller,
$65,875; Mr. Nelson, $65,875; Mr. Rees, $8,375; Mr. Robinson, $62,375; Dr.
Sisto, $30,260; and Mr. Whalen, $65,625. Amounts deferred are retained by
the respective fund and earn a rate of return determined by reference to the
return of the common shares of such fund or other mutual funds in the Fund
Complex as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, it is anticipated that each fund will invest in
securities of those mutual funds selected by the Non-Affiliated Trustees in
order to match the deferred compensation obligation. The trustees' Fund
Complex compensation cap commenced on July 22, 1995 and covered the period
between July 22, 1995 and December 31, 1995. Compensation received prior to
July 22, 1995 was not subject to the cap. For the calendar year ended
December 31, 1995, while certain trustees received compensation over $84,000
in the aggregate, no trustee received compensation in excess of the pro rata
amount of the Fund Complex cap for the period July 22, 1995 through December
31, 1995. In addition to the amounts set forth above, certain trustees
received lump sum retirement benefit distributions not subject to the cap in
1995 related to three mutual funds that ceased investment operations during
1995 as follows: Mr. Gaughan, $22,136; Mr. Miller, $33,205; Mr. Nelson,
$30,851; Mr. Robinson, $11,068; and Mr. Whalen, $27,332. The VK Adviser and
its affiliates also serve as investment adviser for other investment
companies; however, with the exception of Messrs. Powell, McDonnell and
Whalen, the trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the VK
Adviser and its affiliates, Mr. Whalen received Total Compensation of
$268,857 during the calendar year ended December 31, 1995.
As of April 10, 1996, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund. As of April 10, 1996, no trustee or
officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc.
As of April 10, 1996, no person was known by the Fund to own beneficially or
to hold of record as much as 5% of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 10, 1996 SHARES OWNERSHIP
- --------------------------------------------------------- -------------- -------- ---------
<S> <C> <C> <C>
Hill & Wilkinson Inc..................................... 60,453 C 7.50%
11969 Plano Rd. Ste. 190
Dallas, TX 75243-5440
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.). The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership, C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J.
B-25
<PAGE> 105
Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson each of whom
is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of Van Kampen American Capital, Inc. own, in the
aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
13% of the common stock of VK/AC Holding, Inc. Presently, and after giving
effect to the exercise of such options, no officer or trustee of the Fund owns
or would own 5% or more of the common stock of VK/AC Holding, Inc.
The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative services, and permits its officers and employees to
serve without compensation as officers of the Fund and trustees of the Trust if
duly elected to such positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement for the Fund will continue in effect from
year to year if specifically approved by the Trustees of the Trust, of which the
Fund is a separate series (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid advisory
expenses of $3,765,225, $3,475,616 and $2,578,871, respectively.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, shared such costs proportionately among
themselves based upon their respective net asset values.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $121,400, $334,800 and $275,030, respectively, representing the
Distributor's cost of providing certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
advised by the VK Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared
B-26
<PAGE> 106
proportionately based on the number of outstanding classes of securities per
fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $51,800, $18,250 and $16,306, respectively, representing the VK
Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $30,700, $21,950 and $21,500, respectively, representing Van
Kampen American Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund or the Adviser, (ii) have sold or are selling shares
of the Fund and
B-27
<PAGE> 107
(iii) may select firms that are affiliated with the Fund, the Adviser, or its
distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.
State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
more than 80 analysts devoted to various specializations.
Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C & D L.P."), a
Connecticut limited partnership. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 7% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
13% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
B-28
<PAGE> 108
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of shares. The Distribution Plan and Service Plan sometimes are
referred to herein collectively as the "Plans". The Plans provide that the Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor and
sub-agreements between the Distributor and members of the NASD who are acting as
securities dealers and NASD members or eligible non-members who are acting as
brokers or agents and similar agreements between the Fund and financial
intermediaries who are acting as brokers (collectively, "Selling Agreements")
that may provide for their customers or clients certain services or assistance,
which may include, but not be limited to, processing purchase and redemption
transactions, establishing and maintaining shareholder accounts regarding the
Fund, and such other services as may be agreed to from time to time and as may
be permitted by applicable statute, rule or regulation. Brokers, dealers and
financial intermediaries that have entered into sub-agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.
For the year ended December 31, 1995, the Fund has paid expenses under the
Plans of $1,536,337, $1,796,842 and $61,766 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $1,476,771 and $438,889 and
$46,133 represent payments to financial intermediaries under the Selling
Agreements for Class A Shares, Class B Shares, respectively. For the year ended
December 31, 1995, the Fund has reimbursed the Distributor $59,031 and $19,266
for advertising expenses, and $24,261 and $6,877 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
B-29
<PAGE> 109
PERFORMANCE INFORMATION
From time to time marketing materials may provide a portfolio manager update,
an adviser update or discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sectors, ten largest holdings and other Fund asset structures, such as
duration, maturity, coupon, NAV, rating breakdown, AMT exposure and number of
issues in the portfolio. Materials may also mention how Van Kampen American
Capital believes the Fund compares relative to other Van Kampen American Capital
funds. Materials may also discuss the Dalbar Financial Services study from 1984
to 1994 which studied investor cash flow into and out of all types of mutual
funds. The ten year study found that investors who bought mutual fund shares and
held such shares outperformed investors who bought and sold. The Dalbar study
conclusions were consistent regardless of if shareholders purchased their funds
in direct or sales force distribution channels. The study showed that investors
working with a professional representative have tended over time to earn higher
returns than those who invested directly. The Fund will also be marketed on the
Internet.
The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 4% and 1%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum sales charge, if any) at the beginning of
the period, annualizing the increase or decrease over the specified period with
respect to such initial investment and expressing the result as a percentage.
Average compounded total return will be computed separately for each class of
shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, including or
excluding any applicable sales charge as indicated, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
B-30
<PAGE> 110
Non-standardized total return calculations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
CLASS A SHARES
The average total return, including payment of maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1995 was 10.12%; (ii) the 5 year period ended December 31, 1995 was 7.66%; (iii)
the approximately five year, five month period from August 1, 1990 (the
commencement of investment operations of the Fund) through December 31, 1995 was
7.55%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1995 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.61%. The tax-equivalent yield with
respect to Class A Shares for the 30 day period ending December 30, 1995
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 7.20%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.40%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 48.36%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 55.74%.
CLASS B SHARES
The average total return, including payment of the CDSC, with respect to the
Class B Shares for (i) the one year period ended December 31, 1995 was 10.74%
and (ii) the approximately three year, five month period of August 24, 1992
(commencement of distribution) through December 31, 1995 was 5.12%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1995 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.08%. The tax-equivalent yield with
respect to Class B Shares for the 30 day period ending December 30, 1995
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.38%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.94%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 18.61%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 21.11%.
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to the
Class C Shares for (i) the one year period ended December 31, 1995 was 13.74%
and (ii) the approximately one year, five month period of August 13, 1994
(commencement of distribution) through December 31, 1995 was 3.99%.
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1995 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.08%. The tax-equivalent yield with
respect to Class C Shares for the 30 day period ending December 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 6.38%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 4.94%.
B-31
<PAGE> 111
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was 9.91%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was 9.91%.
B-32
<PAGE> 112
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen American Capital Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1995, 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, 1995, 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 American Capital Municipal Income Fund as of December 31, 1995, 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 6, 1996
B-33
<PAGE> 113
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Municipal Bonds
Alabama 2.1%
$ 2,805 Alabama Higher Edl Ln Corp (FSA Insd) ................................... 6.000% 09/01/07 $ 2,953,889
2,100 Alabama St Indl Dev Auth Rev (Var Rate Cpn) ............................. 7.500 09/15/11 2,131,122
3,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC Insd) ....... 6.750 08/15/17 3,408,150
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec Inds Inc Rfdg <F3> ..... 6.500 02/15/09 5,166,918
2,000 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee Insd) ...... 5.875 08/15/25 2,062,780
700 Citronelle, AL Util Brd Wtr Swr & Gas Rev (Prerefunded @ 05/01/97) ...... 9.000 05/01/13 729,505
1,050 IDB of the City of Bessemer, AL Rohn Inc Ser 91A (Var Rate Cpn) ......... 9.000 09/15/01 1,141,224
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser 91A (Var Rate Cpn) ......... 9.500 09/15/11 2,106,615
2,045 Jefferson Cnty, AL Brd Edl Cap Outlay Sch (AMBAC Insd) .................. 5.875 02/15/20 2,123,835
1,000 Mobile, AL Indl Dev Brd Solid Waste Disp Rev Mobile Energy Svcs Co Proj
Rfdg .................................................................... 6.950 01/01/20 1,059,180
-----------
22,883,218
-----------
Alaska 0.8%
2,500 Alaska Energy Auth Pwr Rev First Ser Bradley Lake Proj (BIGI Insd) ...... 6.250 07/01/21 2,568,250
4,500 Alaska St Hsg Fin Corp Ser A (MBIA Insd) ................................ 5.875 12/01/24 4,536,225
1,000 Valdez, AK Marine Term Rev Sohio Pipeline Rfdg .......................... 7.125 12/01/25 1,106,650
----------
8,211,125
----------
Arizona 1.7%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj ............ 5.040 10/01/12 1,008,070
1,000 Maricopa Cnty, AZ Indl Dev Auth Multi-Family Hsg Rev Rfdg ............... 6.500 07/01/09 1,050,480
1,000 Pima Cnty, AZ Indl Dev Auth Single Family Mtg Rev (GNMA Collateralized).. 6.625 11/01/14 1,050,680
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A .............................. 9.500 07/01/10 6,354,358
500 Scottsdale, AZ Indl Dev Auth Rev Mtg Westminster Village A .............. 8.250 06/01/15 538,745
500 Tempe, AZ Indl Dev Auth Indl Dev Rev Ser A .............................. 6.750 12/01/13 510,100
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent Inc ........... 8.700 09/01/19 8,122,870
-----------
18,635,303
-----------
Arkansas 0.6%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist No 8 AR Impt
Ser A <F4> .............................................................. 9.750 07/01/12 3,440,630
5,470 Dogwood Addition PRD Muni Ppty Owners Multi-Purp Impt Dist No 8 AR Impt
Ser B <F4> .............................................................. 9.750 07/01/12 3,440,630
-----------
6,881,260
-----------
California 9.4%
6,750 California Edl Fac Auth Rev College of Osteopathic Med Pacific
(Prerefunded @ 06/01/03) ................................................ 7.500 06/01/18 7,711,335
2,880 California Edl Fac Auth Rev Univ of La Verne ............................ 6.300 04/01/09 2,976,480
4,980 California Hlth Fac Fin Auth Rev Kaiser Permanente Med Cent ............. 5.450 10/01/13 4,904,404
11,175 California Pollutn Ctl Fin Auth Pollutn Ctl Rev Pacific Gas & Elec Co
Ser B (MBIA Insd) ....................................................... 5.850 12/01/23 11,423,308
2,000 California St Pub Wks Brd Lease Rev Dept of Justice Bldg Ser A (FSA
Insd) ................................................................... 5.800 05/01/15 2,078,200
2,000 California Statewide Cmntys Dev Auth Rev Ctfs Partn Sisters Charity ..... 4.875 12/01/10 1,914,000
2,000 Compton, CA Ctfs Partn Ser B ............................................ 7.500 08/01/15 2,139,760
4,285 Delano, CA Ctfs Partn Ser A ............................................. 9.250 01/01/22 4,932,464
1,000 El Centro, CA Ctfs Partn ................................................ 7.000 06/01/19 1,009,720
2,660 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd) ................... * 09/01/10 1,146,141
5,875 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd) ................... * 09/01/11 2,357,696
3,890 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd) ................... * 09/01/13 1,366,868
5,430 Escondido, CA Jt Pwrs Fin Auth Lease Rev (AMBAC Insd) ................... * 09/01/14 1,780,388
975 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj Rfdg .............. 7.875 02/01/15 1,015,882
38,000 Foothill/Eastern Tran Agy Cap Apprec Sr Lien Ser A ...................... * 01/01/27 5,388,780
43,860 Foothill/Eastern Tran Corridor Agy CA Toll Road Rev Sr Lien Ser A ....... * 01/01/25 7,054,881
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 114
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California (Continued)
$ 75,145 Foothill/Eastern Tran Corridor Agy CA Toll Road Rev Sr Lien Ser A ....... *% 01/01/29 $ 9,394,628
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth Rev Grand Cent Sq
Ser A ................................................................... 5.850 12/01/26 918,730
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth Rev Grand Cent Sq
Ser A ................................................................... 5.900 12/01/26 959,540
2,000 Los Angeles, CA Regional Arpts Impt Corp Lease Rev Fac Sublease West .... 11.250 11/01/25 2,062,180
1,000 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA Insd) .............. 6.125 03/15/23 1,058,990
1,500 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA Insd) .............. 5.750 03/15/28 1,534,080
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/05 692,824
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/10 408,078
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/11 340,816
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/12 282,163
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/13 266,525
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev (FSA
Insd) ................................................................... * 06/01/14 251,251
500 Norco, CA Swr & Wtr Rev Rfdg ............................................ 6.700 10/01/13 507,390
500 Norco, CA Swr & Wtr Rev Rfdg ............................................ 7.200 10/01/19 521,405
300 Northern CA Pwr Agy Pub Pwr Rev Geothermal Proj No 3 Ser A .............. 5.000 07/01/09 292,809
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1 Aliso Viejo Ser A
(Prerefunded @ 08/15/02) ................................................ 7.350 08/15/18 3,801,632
4,000 Riverside Cnty, CA Ctfs Partn Air Force Village West Inc A .............. 8.125 06/15/20 4,241,600
6,030 San Bernardino Cnty, CA Ctfs Partn Med Cent Fin Proj Ser A (MBIA Insd)... 5.500 08/01/15 6,026,080
2,625 San Francisco, CA City & Cnty Arpts Comm Intl Arpt Rev 2nd Ser Issue 8A
(FGIC Insd) ............................................................. 6.250 05/01/20 2,781,791
950 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg ............................ 7.000 09/02/15 968,953
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice Cent Proj Ser A Rfdg ...... 5.900 09/01/14 1,989,740
5,000 Victor, CA Elem Sch Dist Cap Apprec Ser A (MBIA Insd) ................... * 06/01/20 1,309,150
----------
99,810,662
----------
Colorado 6.6%
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A .............................. 8.875 08/01/10 3,966,287
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A <F3> ......................... 8.875 08/01/12 5,683,367
13,500 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser C .......... * 08/31/15 3,503,115
29,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser C .......... * 08/31/26 3,198,990
1,330 Arapahoe Cnty, CO Single Family Mtg Rev Ser A (GNMA Collateralized) ..... 8.375 08/01/19 1,398,296
500 Berry Creek Metro Dist CO ............................................... 8.250 12/01/11 559,795
500 Boulder Cnty, CO Indl Dev Rev Boulder Med Cent Proj ..................... 8.875 01/01/17 521,800
1,000 Bowles Metro Dist CO <F2> ............................................... 7.750 12/01/15 996,990
500 Colorado Hlth Fac Auth Rev Cleo Wallace Cent Proj ....................... 7.000 08/01/15 515,655
3,400 Colorado Hlth Fac Auth Rev Hosp North CO Med Cent (MBIA Insd) ........... 6.000 05/15/20 3,552,150
1,500 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A (FSA Insd) ........... 6.250 02/15/21 1,661,745
800 Colorado Hlth Fac Auth Rev Rocky Mtn Adventist Rfdg ..................... 6.625 02/01/13 821,064
1,000 Colorado Hlth Fac Auth Rev Vail Vly Med Cent Proj Ser A ................. 6.500 01/15/13 1,040,740
2,000 Denver, CO City & Cnty Arpt Rev Ser A ................................... 7.000 11/15/99 2,143,640
8,550 Denver, CO City & Cnty Arpt Rev Ser A ................................... 8.500 11/15/23 9,798,386
5,000 Denver, CO City & Cnty Arpt Rev Ser A ................................... 8.000 11/15/25 5,612,700
5,000 Denver, CO City & Cnty Arpt Rev Ser C (MBIA Insd) ....................... 5.600 11/15/25 5,006,100
1,000 Dove Vly Metro Dist CO Arapahoe Cnty .................................... 9.500 12/01/08 1,025,430
1,000 Edgewater, CO Redev Auth Tax Increment Rev .............................. 6.750 12/01/08 1,084,180
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 115
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado (Continued)
$ 3,690 Jefferson Cnty, CO Residential Mtg Rev ..................................... 11.500% 09/01/12 $ 6,275,251
5,000 Meridian Metro Dist CO Peninsular & Oriental Steam Navig Co Rfdg ........... 7.500 12/01/11 5,435,300
630 Mountain Village Metro Dist CO San Miguel Cnty ............................. 7.950 12/01/03 700,251
500 Mountain Village Metro Dist CO San Miguel Cnty ............................. 8.100 12/01/11 563,110
5,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ..................... 6.400 11/15/22 5,384,450
------------
70,448,792
------------
Connecticut 0.5%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home
Pgm AHF/Hartford ........................................................... 7.125 11/01/14 5,784,529
============
Delaware 0.2%
2,000 Delaware St Econ Dev Auth Rev Osteopathic Hosp Assoc Delaware A ............ 6.900 01/01/18 1,951,440
------------
District of Columbia 0.2%
2,500 District of Columbia Rev Natl Pub Radio .................................... 7.700 01/01/23 2,661,775
============
Florida 5.2%
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg & Impt ................ 7.500 10/01/02 537,360
500 Atlantic Beach, FL Rev Fleet Landing Proj Ser A Rfdg & Impt ................ 7.875 10/01/08 559,035
1,000 Broward Cnty, FL Edl Fac Auth Rev Rfdg (Prerefunded @ 04/01/99) ............ 8.500 04/01/10 1,150,240
1,700 Broward Cnty, FL Res Recovery Rev .......................................... 7.950 12/01/08 1,925,386
2,220 Broward Cnty, FL Res Recovery Rev .......................................... 7.950 12/01/08 2,514,328
1,000 Charlotte Cnty, FL Hosp Rev Bon Secours Hlth St. Joseph Ser A (Prerefunded
@ 08/15/98) ................................................................ 8.250 08/15/18 1,124,300
4,000 Collier Cnty, FL Indl Dev Auth Indl Dev Rev Rfdg <F2> ...................... 6.500 10/01/25 3,899,880
24,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg (MBIA Insd) ........ * 02/01/18 6,745,440
2,000 Dade Cnty, FL Prof Sports Franchise Fac Tax Rev (MBIA Insd) ................ * 10/01/24 437,100
560 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg ........................... 7.250 06/01/23 632,593
590 Florida St Brd Edl Cap Outlay Pub Edl Ser A Rfdg (Prerefunded @ 06/01/00)... 7.250 06/01/23 674,565
1,900 Florida St Brd Edl Cap Outlay Pub Edl Ser C (MBIA Insd) .................... 5.600 06/01/20 1,926,106
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev Environmental Preservation 2000
Ser A (MBIA Insd) .......................................................... 4.750 07/01/10 4,844,550
2,255 Greater Orlando Aviation Auth Orlando FL Arpt Fac Rev ...................... 8.375 10/01/16 2,522,781
245 Greater Orlando Aviation Auth Orlando FL Arpt Fac Rev (Prerefunded @
10/01/98) .................................................................. 8.375 10/01/16 276,730
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ................................. 5.750 03/01/02 335,365
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown Cogeneration Proj A
Rfdg ....................................................................... 7.875 12/15/25 3,314,041
1,000 Orange Cnty, FL Hlth Fac Auth Rev Hosp Adventist Hlth Sys (AMBAC Insd) ..... 5.250 11/15/20 984,240
1,000 Orange Cnty, FL Tourist Dev Tax Rev (AMBAC Insd) ........................... 6.000 10/01/16 1,031,740
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev Sun Coast Hosp Ser A
(Prerefunded @ 03/01/00) ................................................... 8.500 03/01/20 5,956,474
1,000 Saint Petersburg, FL Hlth Fac Auth Rev (Prerefunded @ 12/01/99) ............ 7.750 12/01/15 1,152,350
4,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Pptys <F2> .............. 6.700 07/01/25 3,831,920
4,265 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare Kobernick/Meadow Park ......... 10.000 07/01/22 5,539,339
3,000 South Miami, FL Hlth Fac Baptist Hlth Sys Oblig Group Rfdg (MBIA Insd) ..... 5.500 10/01/20 3,006,150
670 Tampa, FL Cap Impt Pgm Rev Ser A ........................................... 8.250 10/01/18 735,908
------------
55,657,921
------------
Georgia 1.3%
3,000 Atlanta, GA Arpt Fac Rev ................................................... 6.250 01/01/21 3,123,150
1,000 Burke Cnty, GA Dev Auth Pollutn Ctl Rev .................................... 9.375 12/01/17 1,103,390
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs Franklin Forest Ser A ........... 8.000 06/01/22 2,875,725
850 Georgia Muni Elec Auth Pwr Rev Ser A ....................................... 6.000 01/01/20 850,145
1,250 Georgia Muni Elec Auth Pwr Rev Ser O ....................................... 8.125 01/01/17 1,362,500
1,750 Georgia Muni Elec Auth Pwr Rev Ser Q ....................................... 8.375 01/01/16 1,915,812
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 116
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Georgia (Continued)
$ 1,500 Muni Elec Auth Georgia Spl Oblig (MBIA Insd) ............................... 6.500% 01/01/20 $ 1,757,625
500 Rockdale Cnty, GA Dev Auth Solid Waste Disposal Rev ........................ 7.500 01/01/26 519,590
------------
13,507,937
------------
Hawaii 2.5%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd) <F3> .......................... 6.350 07/01/07 4,524,447
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co (MBIA Insd) ...... 6.550 12/01/22 15,293,001
220 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc ...................... 9.600 06/01/08 237,514
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc ...................... 9.700 06/01/20 2,538,400
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd) .................................. 6.350 07/01/07 1,650,732
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd) .................................. 6.400 07/01/08 1,760,288
500 Hawaii St Harbor Cap Impt Rev (MBIA Insd) .................................. 7.000 07/01/17 548,860
------------
26,553,242
------------
Illinois 9.2%
4,500 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq Proj <F3> ....... 9.250 02/01/12 5,066,145
1,350 Bridgeview, IL Tax Increment Rev Rfdg ...................................... 9.000 01/01/11 1,471,136
7,000 Broadview, IL Tax Increment Rev Sr Lien <F3> ............................... 8.250 07/01/13 7,661,010
1,000 Chicago, IL Gas Supply Rev Ser A ........................................... 8.100 05/01/20 1,138,140
1,000 Chicago, IL Metro Wtr Reclamation Dist Gtr Chicago ......................... 7.000 01/01/11 1,200,500
1,000 Chicago, IL O'Hare Intl Arpt Rev Ser A ..................................... 6.000 01/01/18 1,014,310
1,000 Chicago, IL O'Hare Intl Arpt Rev Ser B (MBIA Insd) ......................... 6.000 01/01/18 1,017,870
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc .................. 8.500 05/01/18 4,462,840
405 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser A ............ 8.400 05/01/18 446,407
5,035 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B ............ 8.950 05/01/18 5,786,625
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.750 01/01/07 1,323,000
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor Ser B (FGIC
Insd) ...................................................................... * 12/01/08 875,806
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor Ser B (FGIC
Insd) ...................................................................... * 12/01/09 825,129
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor Ser B (FGIC
Insd) ...................................................................... * 12/01/10 756,176
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor Ser B (FGIC
Insd) ...................................................................... * 12/01/11 722,374
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor Ser B (FGIC
Insd) ...................................................................... * 12/01/12 688,874
1,000 Crestwood, IL Tax Increment Rev Rfdg ....................................... 7.250 12/01/08 1,031,210
910 Hanover Park, IL Rev First Mtg Winsdor Park Manor Proj ..................... 9.250 12/01/07 994,657
1,300 Hodgkins, IL Tax Increment ................................................. 9.500 12/01/09 1,532,115
3,500 Hodgkins, IL Tax Increment (Prerefunded @ 12/01/01) ........................ 9.500 12/01/09 4,446,855
1,500 Hodgkins, IL Tax Increment Rev Ser A Rfdg .................................. 7.625 12/01/13 1,569,645
1,500 Huntley, IL Increment Alloc <F2> ........................................... 8.500 12/01/15 1,500,000
1,000 Illinois Dev Fin Auth Elderly Hsg Rev Libertyville Twrs A .................. 6.500 09/01/09 1,041,390
1,600 Illinois Edl Fac Auth Rev Chicago Zoological Society Ser A ................. 6.100 12/15/16 1,620,832
1,000 Illinois Edl Fac Auth Rev Lake Forest College (FSA Insd) ................... 6.750 10/01/21 1,096,530
1,000 Illinois Edl Fac Auth Rev Northwestern Univ Ser 1985 (Prerefunded @
12/01/01) .................................................................. 6.900 12/01/21 1,150,730
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A (Prerefunded @
10/01/02) .................................................................. 9.500 10/01/22 5,296,954
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B ..................... 9.000 10/01/22 2,529,840
2,500 Illinois Hlth Fac Auth Rev Fairview Oblig Group Ser A Rfdg ................. 7.400 08/15/23 2,488,025
545 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ......................... 9.500 11/15/15 647,792
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D (Prerefunded @ 11/15/00). 9.500 11/15/15 530,859
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 117
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Illinois (Continued)
$ 1,000 Illinois Hlth Fac Auth Rev IL Masonic Med Cent Ser B (Prerefunded @
10/01/99) ................................................................. 7.700% 10/01/19 $ 1,143,090
1,000 Illinois Hlth Fac Auth Rev Mem Hosp ....................................... 7.250 05/01/22 1,053,490
500 Illinois Hlth Fac Auth Rev Mercy Cent for Hlth Care Serv .................. 6.625 10/01/12 518,915
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A ........... 10.250 02/01/13 3,999,920
1,000 Illinois Hlth Fac Auth Rev Northwestern Mem Hosp .......................... 6.750 08/15/11 1,079,250
2,600 Illinois Hlth Fac Auth Rev United Med Cent (Prerefunded @ 07/01/03) ....... 8.375 07/01/12 3,218,878
6,100 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg) .................. 9.177 02/13/18 6,793,875
1,250 Mill Creek Wtr Reclamation Dist IL Sew Rev ................................ 8.000 03/01/10 1,282,225
750 Mill Creek Wtr Reclamation Dist IL Wtrwrks Rev ............................ 8.000 03/01/10 769,335
2,800 Regional Tran Auth IL Ser A (AMBAC Insd) .................................. 8.000 06/01/17 3,776,556
7,000 Robbins, IL Res Recovery Rev Robbins Res Recovery Partners Ser A .......... 9.250 10/15/14 7,641,690
865 Round Lake Beach, IL Tax Increment Rev Rfdg ............................... 7.200 12/01/04 906,641
500 Round Lake Beach, IL Tax Increment Rev Rfdg ............................... 7.500 12/01/13 523,560
1,665 Saint Charles, IL Indl Dev Rev Tri City Proj .............................. 7.500 11/01/13 1,723,258
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd) .................. 5.800 04/01/10 1,554,547
------------
97,919,006
------------
Indiana 1.1%
2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc ...................... 7.000 07/01/12 3,012,460
2,000 Indiana Tran Fin Auth Arpt Fac Lease Rev Ser A United Airls ............... 6.250 11/01/16 2,071,860
1,000 Indianapolis, IN Loc Pub Impt Bond Bank Ser A ............................. 6.000 02/01/20 1,017,850
550 Indianapolis, IN Loc Pub Impt Bond Bank Ser D ............................. 6.750 02/01/14 630,107
450 Indianapolis, IN Loc Pub Impt Bond Bank Ser D ............................. 6.500 02/01/22 460,116
1,000 Marion Cnty, IN Hosp Auth Hosp Fac Rev .................................... 6.500 09/01/13 1,061,670
1,500 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South B (MBIA Insd).. 6.250 08/15/22 1,589,160
1,500 Wells Cnty, IN Hosp Auth Rev .............................................. 8.500 04/15/03 1,615,050
------------
11,458,273
------------
Iowa 0.5%
24,475 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser A (AMBAC Insd) ........... * 09/01/16 2,411,766
3,000 Muscatine, IA Elec Rev Rfdg ............................................... 5.000 01/01/08 2,985,270
145 Pocahontas, IA Indl Dev Rev Intl Harvester Co ............................. 10.250 10/01/00 146,962
------------
5,543,998
------------
Kansas 0.2%
1,000 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg (MBIA Insd) ..... 7.000 06/01/31 1,133,990
1,000 Newton, KS Hosp Rev Newton Hlthcare Corp Ser A ............................ 7.750 11/15/24 1,066,540
------------
2,200,530
------------
Kentucky 2.3%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg ....................... 6.550 03/01/09 1,040,550
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds Inc ............................ 9.875 10/01/10 2,854,348
10,950 Jefferson Cnty, KY Cap Projs Corp Rev Muni Multi-Lease Ser A .............. * 08/15/14 3,136,737
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse Fltg) (MBIA
Insd) ..................................................................... 8.394 10/01/08 4,710,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp Ser A Rfdg &
Impt (FSA Insd) ........................................................... 6.125 02/01/12 1,331,437
1,995 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Gtd) .............................. 7.450 01/01/23 2,115,498
8,000 Kentucky St Tpk Auth Res Recovery Road Rev Ser A .......................... 5.000 07/01/08 7,981,600
1,000 Kentucky St Tpk Auth Toll Road Rev Ser A .................................. 5.500 07/01/07 1,002,140
------------
24,172,310
------------
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 118
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Louisiana 1.2%
$ 1,000 Hodge, LA Util Rev ...................................................... 9.000% 03/01/10 $ 1,115,740
1,990 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer Proj Ser 1985.. 10.000 11/15/04 2,769,523
1,000 Lake Charles, LA Harbor & Terminal Dist Port Fac Rev Trunkline Rfdg ..... 7.750 08/15/22 1,143,200
460 Louisiana Pub Fac Auth Rev .............................................. 8.250 09/01/08 504,325
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ............................. * 02/01/15 3,490,900
1,000 Port New Orleans, LA Indl Dev Rev Var Avondale Inds Inc Proj Rfdg ....... 8.250 06/01/04 1,077,130
1,000 Saint Charles Parish, LA Pollutn Ctl Rev Louisiana Pwr & Lt Co .......... 8.250 06/01/14 1,125,330
1,400 West Feliciana Parish, LA Pollutn Ctl Rev Gulf Sts Util Ser A ........... 7.500 05/01/15 1,517,166
------------
12,743,314
------------
Maine 0.2%
1,500 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ....................... 5.450 11/01/99 1,548,555
1,000 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ....................... 5.600 11/01/00 1,044,200
------------
2,592,755
------------
Maryland 0.8%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg .............................................................. 7.550 06/01/17 1,596,735
5,300 Baltimore, MD Cap Apprec Cons Pub Impt Ser (FGIC Insd) .................. * 10/15/10 2,342,229
1,000 Maryland St Energy Fin Admin Ltd Oblig Rev .............................. 7.400 09/01/19 1,058,420
3,000 Northeast MD Waste Disp Auth Solid Waste Rev Montgomery Cnty Res
Recovery Proj Ser A ..................................................... 6.200 07/01/10 3,135,990
------------
8,133,374
------------
Massachusetts 3.1%
1,000 Boston, MA Rev Boston City Hosp (FHA Gtd) ............................... 7.625 02/15/21 1,147,710
1,590 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser A (AMBAC Insd) ......... 7.000 01/01/10 1,722,908
5,000 Massachusetts St Hlth & Edl Fac Auth Rev Emerson Hosp Issue Ser D Rfdg
(FSA Insd) .............................................................. 5.700 08/15/12 5,147,550
3,105 Massachusetts St Hlth & Edl Fac Auth Rev Emerson Hosp Issue Ser D Rfdg
(FSA Insd) .............................................................. 5.800 08/15/18 3,183,091
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med Cent Hosp Ser G
(Embedded Swap) (MBIA Insd) ............................................. 3.100 07/01/13 3,604,272
1,500 Massachusetts St Hlth & Edl Fac Auth Rev Newton Wellesley Hosp Issue Ser
E (MBIA Insd) ........................................................... 5.875 07/01/15 1,580,865
6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent Ser A ....... 5.750 10/01/06 5,294,040
1,000 Massachusetts St Hsg Fin Agy Multi-Family Residential Hsg Ser A ......... 8.750 08/01/08 1,073,280
550 Massachusetts St Hsg Fin Agy Residential Hsg Ser A ...................... 8.400 08/01/21 588,286
1,500 Massachusetts St Indl Fin Agy Hillcrest Edl Ctrs Inc Proj ............... 8.450 07/01/18 1,546,725
995 Massachusetts St Indl Fin Agy Rev Gtr Lynn Mental Hlth Assoc Proj ....... 8.800 06/01/14 1,055,038
1,000 Massachusetts St Indl Fin Agy Rev Reeds Landing ......................... 8.625 10/01/23 1,049,460
700 Massachusetts St Indl Fin Agy Rev Vinfen Corp Issue ..................... 7.100 11/15/18 714,854
1,000 Massachusetts St Indl Fin Agy Rev Wtr Treatment American Hingham ........ 6.600 12/01/15 1,035,000
2,000 Massachusetts St Wtr Res Auth Ser A (Prerefunded @ 04/01/00) ............ 7.500 04/01/16 2,292,300
2,000 Plymouth Cnty, MA Ctfs Partn Ser A ...................................... 7.000 04/01/22 2,248,620
------------
33,283,999
------------
Michigan 2.1%
1,000 Detroit, MI Area No 1 Ser A ............................................. 7.600 07/01/10 1,116,440
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson Hlthcare Ser A
Rfdg (AMBAC Insd) ....................................................... 6.250 07/01/12 2,140,740
2,600 Lowell, MI Area Schs Cap Apprec Rfdg (FGIC Insd) ........................ * 05/01/17 818,558
2,000 Michigan St Hosp Fin Auth Rev Garden City Hosp .......................... 8.300 09/01/02 2,125,480
1,000 Michigan St Hosp Fin Auth Rev Hosp Genesys Hlth Sys Ser A Rfdg .......... 7.500 10/01/07 1,077,750
3,140 Michigan St Hosp Fin Auth Rev Hosp Port Huron Hosp Oblig Rfdg (FSA Insd). 5.375 07/01/12 3,157,396
1,000 Michigan St Hosp Fin Auth Rev Hosp Sinai Hosp Rfdg ...................... 6.700 01/01/26 1,012,330
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 119
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michigan (Continued)
$ 5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded Swap) (AMBAC
Insd) ................................................................ 3.300% 04/01/04 $ 5,404,280
3,500 Michigan St Strategic Fund Ltd Oblig Rev Great Lakes Pulp & Fibre
Proj ................................................................. 10.250 12/01/16 3,702,370
1,000 Mount Clemens, MI Hsg Corp Multi-Family Rev Hsg Ser A Rfdg (FHA Gtd).. 6.600 06/01/13 1,058,130
1,000 Royal Oak, MI Hosp Fin Auth Hosp Rev Ser D ........................... 6.750 01/01/20 1,075,670
------------
22,689,144
------------
Minnesota 0.6%
1,000 North Saint Paul, MN Multi-Family Rev Cottages ....................... 9.250 02/01/22 1,083,720
2,500 Saint Paul, MN Port Auth Hsg & Redev Multi-Family Hsg Rev ............ 9.500 12/01/11 2,215,525
2,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg ............... 5.000 01/01/16 1,911,100
1,250 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser C .................... 5.000 01/01/17 1,188,387
------------
6,398,732
------------
Mississippi 0.8%
1,500 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy Res Inc Rfdg ........... 7.300 05/01/25 1,572,435
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev Weyerhaeuser Co
Rfdg (Inverse Fltg) .................................................. 6.760 04/01/22 5,753,700
1,155 Ridgeland, MS Urban Renewal Rev Orchard Ltd Proj Ser A Rfdg .......... 7.750 12/01/15 1,217,578
------------
8,543,713
------------
Missouri 1.7%
2,535 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A <F2> ........ 5.750 10/01/04 2,480,269
2,835 Kansas City, MO Port Auth Fac Riverfront Park Proj Ser A <F2> ........ 5.750 10/01/06 2,774,728
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg Proj Rfdg &
Impt ................................................................. 7.125 08/15/12 2,152,500
1,810 Missouri St Econ Dev Export & Infrastructure Brd Med Office Fac Rev
(MBIA Insd) .......................................................... 7.250 06/01/04 2,101,229
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office Fac Rev
(MBIA Insd) .......................................................... 7.250 06/01/14 4,517,487
1,000 Missouri St Hlth & Edl Fac Auth ...................................... 8.125 10/01/10 1,149,910
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev Mary Queen &
Mother Proj Rfdg (GNMA Collateralized) ............................... 7.125 03/20/23 2,380,179
945 Saint Louis, MO Tax Increment Rev Ser A Scullin Redev Area ........... 10.000 08/01/10 1,120,987
------------
18,677,289
------------
Montana 0.6%
7,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj ..... 7.000 12/31/19 6,896,120
------------
Nebraska 0.8%
5,000 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) (GNMA
Collateralized) ...................................................... 9.609 10/17/23 5,606,250
850 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) (GNMA
Collateralized) ...................................................... 9.099 09/15/24 926,500
1,600 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) (GNMA
Collateralized) ...................................................... 10.923 09/10/30 1,856,000
------------
8,388,750
------------
Nevada 1.3%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC Insd) <F3> .... 6.700 06/01/22 4,318,640
2,485 Henderson, NV Loc Impt Dist No T-4 Ser A ............................. 8.500 11/01/12 2,636,734
2,575 Humboldt Genl Hosp Dist NV ........................................... 6.125 06/01/13 2,610,046
2,220 Nevada Hsg Div Single Family Ser D <F2> .............................. 6.200 10/01/23 2,236,517
2,000 Washoe Cnty, NV Hosp Fac Rev Washoe Med Cent A Rfdg (FSA Insd) ....... 6.000 06/01/15 2,076,380
------------
13,878,317
------------
New Hampshire 0.9%
1,000 New Hampshire Higher Edl & Hlth Fac Auth Rev ......................... 7.500 06/01/05 1,059,450
1,555 New Hampshire Higher Edl & Hlth Fac Auth Rev ......................... 8.800 06/01/09 1,668,017
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev ......................... 7.625 07/01/16 2,217,720
1,000 New Hampshire St Business Fin Auth Elec Fac Rev ...................... 7.750 06/01/14 1,043,740
------------
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 120
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire (Continued)
$ 1,000 New Hampshire St Indl Dev Auth Rev ................................... 10.750% 10/01/12 $ 1,130,320
1,000 New Hampshire St Indl Dev Auth Rev Pollutn Ctl New England Pwr Co .... 7.800 04/01/16 1,029,060
1,000 New Hampshire St Tpk Sys Rev Ser A Rfdg (FGIC Insd) .................. 6.750 11/01/11 1,162,660
------------
9,310,967
------------
New Jersey 1.2%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (MBIA Insd) .......... 7.036 08/15/10 6,881,661
1,000 New Jersey Econ Dev Auth Econ Dev Rev ................................ 7.500 07/01/20 1,015,380
1,000 New Jersey Econ Dev Auth Econ Dev Rev United Methodist Homes ......... 7.500 07/01/25 1,027,920
3,200 New Jersey St Tpk Auth Rev Ser C Rfdg ................................ 6.500 01/01/16 3,599,936
------------
12,524,897
------------
New Mexico 0.3%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan
Regl Med Cent Inc Proj ............................................... 7.900 06/01/11 2,857,550
------------
New York 13.1%
3,415 Clifton Springs, NY Hosp & Clinic Hosp Rev Rfdg ...................... 8.000 01/01/20 3,543,370
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper Corp
Recycling ............................................................ 8.000 01/01/09 2,690,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5 Rfdg .......... 7.000 07/01/12 5,515,400
1,500 Metropolitan Tran Auth NY Tran Fac Rev Ser G (MBIA Insd) ............. 5.500 07/01/15 1,500,990
1,000 New York City Indl Dev Agy Civic Fac Marymount Manhattan College Proj. 7.000 07/01/23 1,051,310
20,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev (MBIA Insd) ........ 5.350 06/15/12 19,956,000
1,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A .............. 5.500 06/15/23 985,340
3,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A (Prerefunded
@ 06/15/00) (MBIA Insd) .............................................. 7.250 06/15/15 3,420,510
1,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A (Prerefunded
@ 06/15/97) .......................................................... 7.625 06/15/16 1,070,120
4,100 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B .............. 5.000 06/15/17 3,816,649
2,500 New York City Ser B .................................................. 7.500 02/01/07 2,820,600
8,000 New York City Ser B (AMBAC Insd) ..................................... 7.250 08/15/07 9,686,560
5,000 New York City Ser C Rfdg ............................................. 6.500 08/01/04 5,277,100
7,500 New York City Ser C Subser C1 ........................................ 7.500 08/01/20 8,426,625
2,000 New York City Ser D Rfdg ............................................. 8.000 02/01/05 2,319,560
2,200 New York City Ser E .................................................. 5.700 08/01/08 2,167,880
3,000 New York City Ser F <F2> ............................................. 5.750 02/01/15 2,940,270
2,000 New York City Ser G <F2> ............................................. 5.750 02/01/17 1,958,040
14,600 New York St Dorm Auth Rev City Univ 3rd Genl Resources Ser E (MBIA
Insd) <F3> ........................................................... 6.750 07/01/24 16,582,680
3,500 New York St Dorm Auth Rev City Univ Sys Cons Ser A ................... 5.625 07/01/16 3,534,020
1,000 New York St Dorm Auth Rev City Univ Sys Cons Ser A (Prerefunded @
07/01/97) ............................................................ 8.125 07/01/17 1,082,990
2,750 New York St Dorm Auth Rev Court Fac Lease Ser A ...................... 5.500 05/15/10 2,721,565
3,250 New York St Dorm Auth Rev St Univ Edl Fac Ser A (Prerefunded @
05/15/00) ............................................................ 7.700 05/15/12 3,770,130
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) ........ 8.295 04/01/20 2,846,875
2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara Mohawk Pwr
Corp Ser A Rfdg (FGIC Insd) .......................................... 7.200 07/01/29 2,333,420
1,000 New York St Environmental Fac Corp Wtr Fac Rev Long Island Wtr Corp
Proj A ............................................................... 10.000 10/01/17 1,105,710
1,955 New York St Med Care Fac Fin Agy Rev Hosp & Nursing Home Mtg (FHA
Gtd) ................................................................. 7.250 02/15/09 2,127,626
490 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac Ser A ...... 7.750 08/15/11 554,401
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac Ser A
(Prerefunded @ 02/15/01) ............................................. 7.750 08/15/11 1,556,742
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 121
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York (Continued)
$ 495 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac Ser C ............ 7.300% 02/15/21 $ 553,950
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac Ser C
(Prerefunded @ 08/15/01) ................................................... 7.300 02/15/21 1,762,054
1,000 New York St Med Care Fac Fin Agy Rev Mtg Hosp Ser A Rfdg (Prerefunded @
08/18/97) (FHA Gtd) ........................................................ 8.000 02/15/25 1,087,270
1,000 New York St Med Care Fac Fin Agy Rev North Genl Hosp ....................... 7.400 02/15/19 1,061,750
3,000 New York St Med Care Fac Fin Agy Rev Presbyterian Hosp Ser A Rfdg (MBIA
Insd) ...................................................................... 5.375 02/15/25 2,969,280
2,400 New York St Urban Dev Corp Rev Correctional Fac Rfdg ....................... 5.625 01/01/07 2,426,160
2,000 New York St Urban Dev Corp Rev St Fac (Prerefunded @ 04/01/01) ............. 7.500 04/01/20 2,331,020
3,265 New York St Urban Dev Corp Rev Univ Fac Grants Rfdg ........................ 5.500 01/01/15 3,251,646
1,000 Port Auth NY & NJ Cons Ninety Fifth Ser .................................... 6.125 07/15/22 1,048,760
4,000 Port Auth NY & NJ Cons Rev Bonds (MBIA Insd) ............................... 5.750 09/15/12 4,171,160
1,000 Triborough Bridge & Tunnel Auth NY Rev Ser N (Prerefunded @ 01/01/98) ...... 7.875 01/01/18 1,090,870
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy Proj ......................... 8.000 03/15/22 1,084,670
-------------
140,201,823
-------------
North Carolina 1.2%
5,000 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth Rev ........................ 6.000 11/01/25 5,083,450
7,695 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev (Prerefunded @ 01/01/22) ..... 4.500 01/01/24 7,003,143
335 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev Ser A Rfdg (Prerefunded @
01/01/98) .................................................................. 8.000 01/01/21 367,793
-------------
12,454,386
-------------
North Dakota 0.6%
1,230 Mercer Cnty, ND Pollutn Ctl Rev Basin Elec Pwr E Convertible ............... 7.000 01/01/19 1,319,286
2,500 Mercer Cnty, ND Pollutn Ctl Rev Basin Elec Pwr Second Ser Rfdg (AMBAC Insd). 6.050 01/01/19 2,643,075
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp Proj ............... 8.875 11/15/24 2,241,340
-------------
6,203,701
-------------
Ohio 2.1%
500 Cleveland, OH Pkg Fac Rev .................................................. 8.000 09/15/12 551,420
750 Coshocton Cnty, OH Solid Waste Disp Rev Stone Container Corp Proj Rfdg ..... 7.875 08/01/13 813,765
1,000 Cuyahoga Cnty, OH Hlth Care Fac Rev Jennings Hall .......................... 7.300 11/15/23 1,002,240
500 Fairfield, OH Econ Dev Rev Beverly Enterprises Proj ........................ 8.500 01/01/03 545,975
8,390 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) (GNMA
Collateralized) ............................................................ 9.477 03/31/31 9,281,437
1,000 Ohio St Air Quality Dev Auth Rev JMG Funding Ltd Partnership Proj Rfdg
(AMBAC Insd) ............................................................... 6.375 04/01/29 1,095,580
1,000 Ohio St Solid Waste Rev Rep Engineered Steels Proj ......................... 8.250 10/01/14 1,015,730
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev Coll Cleveland Elec Ser A Rfdg .... 8.000 10/01/23 2,171,440
4,000 Ohio St Wtr Dev Auth Rev Pure Wtr Rfdg & Impt (AMBAC Insd) ................. 5.500 12/01/18 4,020,800
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj ............................... 7.750 12/01/09 1,531,335
-------------
22,029,722
-------------
Oklahoma 1.6%
7,685 Grand River Dam Auth OK Rev ................................................ 5.000 06/01/12 7,454,373
1,980 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd) ...................... 5.250 12/01/22 1,956,003
2,745 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B (GNMA Collateralized) ... 7.997 08/01/18 3,037,699
1,635 Tulsa, OK Indl Auth Hosp Rev Tulsa Reg Med Cent ............................ 7.200 06/01/17 1,868,462
1,000 Tulsa, OK Muni Arpt Tran Rev American Airls Inc ............................ 7.600 12/01/30 1,090,490
1,500 Woodward, OK Muni Auth Sales Tax & Util (Prerefunded @ 11/01/97) ........... 8.000 11/01/12 1,617,225
-------------
17,024,252
-------------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 122
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oregon 0.0%
$ 500 Salem, OR Hosp Fac Auth Rev Cap Manor Inc ............................ 7.500% 12/01/24 $ 526,240
------------
Pennsylvania 4.3%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser A Rfdg ........ 6.750 11/15/14 3,069,090
2,000 Butler Cnty, PA Indl Dev Auth First Mtg Rev Sherwood Oaks Proj Ser A
Rfdg (Crossover Rfdg @ 06/01/96) ..................................... 8.750 06/01/16 2,080,200
500 Chartiers Vly, PA Indl & Commercial Dev Auth First Mtg Rev ........... 7.250 12/01/11 515,930
500 Chartiers Vly, PA Indl & Commercial Dev Auth First Mtg Rev ........... 7.400 12/01/15 517,755
5,000 Chester Cnty, PA Hlth & Edl Fac Auth Hlth Sys Rev (AMBAC Insd) ....... 5.650 05/15/20 5,015,150
970 Clearfield, PA Hosp Auth Rev Clearfield Hosp Proj Rfdg ............... 6.875 06/01/16 979,622
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp Crozer-Chester Mem Cent ... 6.000 12/15/20 1,898,500
1,500 Delaware Cnty, PA Indl Dev Auth Rev Res Recovery Proj Ser A .......... 8.100 12/01/13 1,575,360
2,760 Delaware River Port Auth PA (FGIC Insd) .............................. 5.500 01/01/26 2,782,936
1,750 Emmaus, PA Genl Auth Rev Ser A (BIGI Insd) ........................... 8.150 05/15/18 1,929,603
2,500 Emmaus, PA Genl Auth Rev Ser C (BIGI Insd) ........................... 7.900 05/15/18 2,761,875
500 Erie Cnty, PA Hosp Auth Rev Metropolitan Hlth Cent ................... 7.250 07/01/12 485,060
845 Lebanon Cnty, PA Good Samaritan Hosp Auth Rev ........................ 5.850 11/15/07 829,359
1,000 Lebanon Cnty, PA Hlth Fac Auth Hlth Cent Rev United Church of Christ
Homes Rfdg ........................................................... 6.750 10/01/10 1,018,720
980 Lehigh Cnty, PA Indl Dev Auth Indl Dev Rev Rfdg ...................... 8.000 08/01/12 1,023,502
1,315 Luzerne Cnty, PA Indl Dev Auth First Mtg Gross Rev Rfdg .............. 7.875 12/01/13 1,348,953
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj (Crossover Rfdg
@ 10/01/00) .......................................................... 8.875 10/01/20 1,802,250
1,000 McKeesport, PA Hosp Auth Rev McKeesport Hosp Proj Rfdg ............... 6.500 07/01/08 1,006,470
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev (Embedded Swap)
(AMBAC Insd) ......................................................... 6.500 06/01/12 3,127,500
1,000 Montgomery Cnty, PA Indl Dev Auth Retirement Cmnty Rev ............... 6.300 01/01/13 973,580
1,000 Montgomery Cnty, PA Indl Dev Auth Rev Res Recovery ................... 7.500 01/01/12 1,096,730
500 Pennsylvania St Higher Edl Fac Auth College & Univ Rev Hahnemann Univ
Proj (MBIA Insd) ..................................................... 7.200 07/01/19 554,210
250 Pennsylvania St Higher Edl Fac Auth Rev Med College PA Ser A ......... 7.500 03/01/14 260,690
915 Philadelphia, PA Auth for Indl Dev Rev ............................... 6.125 02/15/03 921,478
695 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev ................. 7.250 03/01/24 681,823
985 Philadelphia, PA Muni Auth Rev Lease Ser B Rfdg ...................... 6.400 11/15/16 1,020,273
1,825 Ridley Park, PA Hosp Auth Rev Hosp Auth Rev Ser 1993 A ............... 6.000 12/01/13 1,703,528
1,000 Scranton Lackawanna, PA Hlth & Welfare ............................... 7.375 07/15/08 1,053,500
500 Scranton Lackawanna, PA Hlth & Welfare Auth Rev Moses Taylor Hosp
Proj ................................................................. 8.250 07/01/09 543,355
2,330 Somerset Cnty, PA Genl Auth Comwlth Lease Rev (Prerefunded @
10/15/01) (FGIC Insd) ................................................ 6.250 10/15/11 2,568,196
1,000 Washington Cnty, PA Hosp Auth Rev Hosp Canonsburg Genl Hosp Rfdg ..... 7.350 06/01/13 953,500
------------
46,098,698
------------
Rhode Island 0.7%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ............................ 8.000 09/01/24 2,219,900
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B (FHA Gtd) ....... 7.950 10/01/30 2,503,733
1,880 West Warwick, RI Ser A ............................................... 6.800 07/15/98 1,926,492
600 West Warwick, RI Ser A ............................................... 7.300 07/15/08 654,432
------------
7,304,557
------------
South Carolina 0.2%
1,070 Piedmont Muni Pwr Agy SC Elec Rev .................................... 5.000 01/01/25 953,948
500 South Carolina St Hsg Fin & Dev Auth Multi-Family Rev ................ 6.125 12/01/15 501,440
500 South Carolina St Hsg Fin & Dev Auth Multi-Family Rev ................ 6.200 12/01/20 502,480
------------
1,957,868
------------
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 123
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
South Dakota 0.3%
$ 1,000 South Dakota St Hlth & Edl FAc Auth Rev Huron Reg Med Cent............... 7.250% 04/01/20 $ 1,046,980
150 South Dakota St Hlth & Edl Fac Auth Rev Sioux Vly Hosp................... 7.625 11/01/13 163,475
1,850 South Dakota St Hlth & Edl Fac Auth Rev Sioux Vly Hosp
(Prerefunded @ 11/01/98)................................................. 7.625 11/01/13 2,061,214
-----------
3,271,669
-----------
Texas 6.6%
1,000 Austin, TX Hsg Fin Corp Multi-Family Hsg Rev Stassney
Woods Apartment Rfdg .................................................... 6.750 04/01/19 1,031,960
1,000 Austin, TX Util Sys Rev Ser A (Prerefunded @ 11/15/98) .................. 7.800 11/15/12 1,121,570
2,380 Austin, TX Util Sys Rev Ser B ........................................... 7.800 11/15/12 2,621,618
500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev St Lukes Lutheran Hosp ........ 7.000 05/01/21 612,890
1,500 Bexar Cnty, TX Hlth Fac Dev Corp Hosp Rev St Lukes Lutheran Hosp
(Prerefunded @ 05/01/03) ................................................ 7.900 05/01/18 1,812,495
410 Bexar Cnty, TX Hsg Fin Corp Rev Ser A (GNMA Collateralized) ............. 8.200 04/01/22 435,297
410 Bexar Cnty, TX Hsg Fin Corp Rev Ser B (GNMA Collateralized) ............. 9.250 04/01/16 431,767
1,595 Capital Indl Dev Corp TX Pollutn Ctl .................................... 7.400 05/01/12 1,765,617
625 Clear Creek, TX Indpt Sch Dist (Prerefunded @ 02/01/01) ................. 6.250 02/01/11 681,931
940 Dallas-Fort Worth, TX Intl Arpt Fac Impt Corp Rev American Airls Inc .... 7.500 11/01/25 1,008,780
125 El Paso, TX Ppty Fin Auth Inc Single Family Mtg Rev Ser A (GNMA
Collateralized) ......................................................... 8.700 12/01/18 135,266
500 Eldridge Rd Muni Util Dist TX Rfdg ...................................... 6.125 03/01/11 495,565
500 Fort Bend Cnty, TX Levee Impt Dist No 011 (Prerefunded @ 03/01/99) ...... 8.700 03/01/09 564,380
440 Fort Bend Cnty, TX Levee Impt Dist No 011 (Prerefunded @ 03/01/99) ...... 8.700 03/01/10 496,654
605 Fort Worth, TX Hsg Fin Corp Home Mtg Rev Ser A Rfdg ..................... 8.500 10/01/11 665,657
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow Freight Sys Inc Proj ...... 8.000 12/01/16 2,636,875
1,000 Harris Cnty, TX Hlth Fac Dev Corp Hosp Rev .............................. 7.125 06/01/15 1,102,980
665 Harris Cnty, TX Hsg Fin Corp Single Family Hsg Rev ...................... 10.125 07/15/03 668,378
500 Harris Cnty, TX Muni Util Dist No 157 Rfdg .............................. 7.300 03/01/14 520,810
620 Houston, TX Hsg Fin Corp Single Family Mtg Rev .......................... 10.000 09/15/14 619,826
770 Houston, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg (FSA Insd) .... 5.950 12/01/10 796,889
1,160 Jefferson Cnty, TX Hlth Fac Dev Corp Hosp Rev Baptist Hlth Care ......... 8.300 10/01/14 1,203,616
2,000 Matagorda Cnty, TX Navig Dist No 1 Rev Coll Houston Lt & Pwr Rfdg (MBIA
Insd) ................................................................... 5.800 10/15/15 2,035,140
1,000 Mills Road Muni Util Dist TX Util Bonds Rfdg ............................ 6.500 09/01/14 1,024,890
500 Mission Bend Muni Util Dist No 2 TX ..................................... 10.000 09/01/98 567,915
375 Mission Bend Muni Util Dist No 2 TX ..................................... 10.000 09/01/00 431,175
655 Montgomery Cnty, TX Util Dist No 4 (Prerefunded @ 09/01/98) ............. 8.900 09/01/02 733,744
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C Presbyterian Hlthcare Sys
(Inverse Fltg) (MBIA Insd) .............................................. 8.720 06/22/21 4,103,750
500 North Mission Glen Muni Util Dist TX Ser 1993 ........................... 6.500 09/01/14 508,995
750 Northwest Harris Cnty Muni Util Dist No 23 TX ........................... 8.100 10/01/15 824,415
1,500 Richardson, TX Hosp Auth Hosp Rev ....................................... 6.750 12/01/23 1,524,810
1,750 Rusk Cnty, TX Hlth Fac Corp Hosp Rev .................................... 7.750 04/01/13 1,833,178
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev ......................... 6.750 10/01/14 950,000
1,000 Sam Rayburn, TX Muni Pwr Agy Pwr Supply Sys Rev Ser A Rfdg .............. 6.250 10/01/17 892,220
500 Texas Genl Serv Comm Partn Interests Office Bldg & Land Acquisition
Proj..................................................................... 7.000 08/01/19 515,045
500 Texas Genl Serv Comm Partn Interests Office Bldg & Land Acquisition
Proj .................................................................... 7.000 08/01/24 515,045
980 Texas Genl Serv Comm Partn Lease Purchase Cert .......................... 7.500 02/15/13 1,014,605
8,565 Texas Muni Pwr Agy Rev Rfdg ............................................. 5.500 09/01/13 8,567,655
3,882 Texas St ................................................................ 6.350 12/01/13 3,989,786
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll Ser C Rfdg (Inverse
Fltg) (GNMA Collateralized) ............................................. 9.156 07/02/24 6,326,250
4,025 Texas St Higher Edl Coordinating Brd College Student Ln <F5> ............ 0/7.850 10/01/25 2,586,827
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 124
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas (Continued)
$ 1,000 Texas St Superconducting Ser C .............................................. 5.500% 04/01/20 $ 1,000,500
1,420 Texas St Veterans Hsg Assistance (MBIA Insd) ................................ 6.800 12/01/23 1,506,109
245 Travis Cnty, TX Hsg Fin Corp Single Family Mtg Rev (GNMA Collateralized) .... 8.200 04/01/22 258,965
1,000 Tyler, TX Hlth Fac Dev Corp Hosp Rev ........................................ 6.750 11/01/25 1,023,680
1,000 Weslaco, TX Hlth Fac Dev Corp Hosp Rev Knapp Med Cen Rfdg (Connie Lee Insd).. 5.250 06/01/16 988,230
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union Carbide Chem &
Plastics .................................................................... 8.200 03/15/21 2,569,973
500 Willow Fork Drainage Dist TX ................................................ 7.000 03/01/12 540,245
500 Willow Fork Drainage Dist TX ................................................ 7.000 03/01/13 538,620
1,000 Winters, TX Wtrwrks & Swr Sys Rev (Prerefunded @ 08/01/03) .................. 8.500 08/01/17 1,256,150
------------
70,058,738
------------
Utah 2.9%
3,180 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj .......................... 9.500 12/15/18 3,532,726
1,340 Hilldale, UT Elec Rev <F2> .................................................. 7.800 09/01/15 1,309,019
1,000 Hilldale, UT Elec Rev <F2> .................................................. 8.000 09/01/20 991,320
1,000 Hilldale, UT Elec Rev <F2> .................................................. 7.800 09/01/25 968,480
1,850 Intermountain Pwr Agy UT Pwr Supply Rev ..................................... 5.000 07/01/16 1,725,255
1,000 Intermountain Pwr Agy UT Pwr Supply Rev Ser A ............................... 6.000 07/01/23 1,011,460
3,650 Intermountain Pwr Agy UT Pwr Supply Rev Ser B Rfdg .......................... 7.750 07/01/20 3,985,654
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Embedded Swap) ............... 5.660 02/15/12 11,569,140
1,000 Utah St Bldg Ownership Auth Lease Rev Dept Employment Security Proj
(Prerefunded @ 08/15/98) .................................................... 7.800 08/15/10 1,095,130
1,300 Utah St Bldg Ownership Auth Lease Rev Dept Employment Security Proj
(Prerefunded @ 08/15/98) .................................................... 7.800 08/15/11 1,423,669
1,260 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A1 (FHA Gtd) ................... 7.100 07/01/14 1,329,930
1,690 Utah St Hsg Fin Agy Single Family Mtg Sr Ser A2 (FHA Gtd) ................... 7.200 01/01/27 1,790,149
------------
30,731,932
------------
Virginia 2.3%
2,000 Fairfax Cnty, VA Park Auth Park Fac Rev ..................................... 6.625 07/15/14 2,143,040
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Inverse Fltg) (FGIC Insd) .... 6.600 08/15/23 3,740,415
3,000 Hanover Cnty, VA Indl Dev Auth Hosp Rev Mem Reg Med Cent Proj (MBIA Insd) ... 5.500 08/15/25 2,997,600
2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ...................................... 6.800 03/01/14 2,363,026
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ...................................... 6.900 03/01/19 1,143,450
5,000 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp Carilion Hlth Sys Ser B
Rfdg (MBIA Insd) ............................................................ 4.700 07/01/20 4,876,350
1,250 Southeastern Pub Svc Auth VA Rev Sr Regl Solid Waste Sys .................... 6.000 07/01/17 1,236,463
5,000 Upper Occoquan Sewage Auth VA Reg Sew Rev Rfdg (FGIC Insd) .................. 5.000 07/01/21 4,842,450
1,250 Virginia Port Auth Comwlth Port Fund Rev .................................... 8.200 07/01/08 1,375,312
------------
24,718,106
------------
Washington 1.2%
1,000 Lewis Cnty, WA Pub Util Dist No 001 ......................................... 6.000 10/01/24 1,021,560
1,000 Port Walla Walla, WA Pub Corp Solid Waste Recycling Rev Ponderosa Fibres
Proj ........................................................................ 9.125 01/01/26 1,037,300
445 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev ...................... 15.000 07/01/17 482,892
1,250 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev (Prerefunded @
07/01/96) (FGIC Insd) ....................................................... 7.125 07/01/16 1,539,462
2,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev (Prerefunded @
01/01/01) ................................................................... 7.625 07/01/10 2,336,860
2,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev ...................... 7.000 07/01/12 2,744,300
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 125
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Washington (Continued)
$ 1,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev (Prerefunded @
07/01/00) ................................................................ 7.375% 07/01/12 $ 1,147,910
3,000 Washington St Pub Pwr Supply Sys Nuclear Proj No 3 Rev (MBIA Insd) ....... 5.600 07/01/17 3,020,850
--------------
13,331,134
--------------
West Virginia 0.7%
6,750 South Charleston, WV Indl Dev Rev Union Carbide Chem & Plastics Ser A .... 8.000 08/01/20 7,364,182
--------------
Wisconsin 1.1%
750 Jefferson, WI Swr Sys Wtrwrks & Elec Sys Mtg Rev
(Prerefunded @ 07/01/01) ................................................. 7.400 07/01/16 865,290
3,040 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg (Inverse Fltg) ..... 9.755 10/25/22 3,397,200
600 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn .................. 7.200 11/01/05 608,820
1,800 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn .................. 7.875 11/01/22 1,828,926
1,000 Wisconsin St Hlth & Edl Fac Auth Rev United Lutheran Proj Aging Inc ...... 8.500 03/01/19 1,065,570
2,000 Wisconsin St Hlth & Edl Fac Auth Rev Wheaton Franciscan (Prerefunded @
08/15/98) ................................................................ 8.200 08/15/18 2,246,140
1,500 Wisconsin St Hlth & Edl Fac Hlth Fac SSM Hlth Care Ser A (MBIA Insd) ..... 5.875 06/01/20 1,542,675
--------------
11,554,621
--------------
Puerto Rico 0.3%
1,000 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg ............................. 5.500 07/01/12 1,012,760
2,000 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg ............................. 5.500 07/01/14 2,016,960
--------------
3,029,720
--------------
U.S. Virgin Islands 0.1%
500 University of Virgin Islands Ser A ....................................... 7.500 10/01/09 554,045
500 University of Virgin Islands Ser A ....................................... 7.650 10/01/14 555,465
--------------
1,109,510
--------------
Total Long-Term Investments 99.3%
(Cost $964,751,897) <F1>.............................................................................. 1,060,171,101
Short-Term Investments at Amortized Cost 0.7%......................................................... 7,000,000
Other Assets in Excess of Liabilities 0.0%........................................................... 309,823
--------------
Net Assets 100%...................................................................................... $1,067,480,924
==============
*Zero coupon bond
<FN>
(F1) At December 31, 1995, for federal income tax purposes cost is
$965,153,852, the aggregate gross unrealized appreciation is $101,335,448
and the aggregate gross unrealized depreciation is $5,959,830, resulting
in net unrealized appreciation including options and futures transactions
of $95,375,618.
(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.
(F4) Non-income producing security.
(F5) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
</FN>
</TABLE>
The following table summarizes the portfolio composition at December 31, 1995,
based upon quality ratings issued by Standard & Poor's. For securities not
rated by Standard & Poor's, the Moody's rating is used.
Portfolio Composition by Credit Quality
<TABLE>
<S> <C>
AAA.......... 38.9%
AA........... 5.7
A............ 13.9
BBB.......... 17.3
BB........... 3.4
B............ 0.6
CCC.......... 0.2
Non-Rated.... 20.0
-------
100.0%
=======
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 126
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $964,751,897) (Note 1).......................... $ 1,060,171,101
Short-Term Investments (Note 1).................................................... 7,000,000
Receivables:
Investments Sold................................................................. 36,519,175
Interest......................................................................... 17,507,019
Fund Shares Sold................................................................. 14,436,996
Margin on Futures (Note 5)....................................................... 764
Other.............................................................................. 4,412
----------------
Total Assets.................................................................. 1,135,639,467
----------------
Liabilities:
Payables:
Investments Purchased............................................................ 60,935,991
Income Distributions ............................................................ 2,272,903
Custodian Bank................................................................... 2,000,189
Fund Shares Repurchased.......................................................... 690,113
Investment Advisory Fee (Note 2)................................................. 424,442
Accrued Expenses................................................................... 1,834,905
----------------
Total Liabilities.............................................................. 68,158,543
----------------
Net Assets......................................................................... $ 1,067,480,924
================
Net Assets Consist of:
Capital (Note 3)................................................................... $ 1,015,710,581
Net Unrealized Appreciation on Investments......................................... 95,777,573
Accumulated Distributions in Excess of Net Investment Income (Note 1).............. (553,439)
Accumulated Net Realized Loss on Investments....................................... (43,453,791)
----------------
Net Assets......................................................................... $ 1,067,480,924
================
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$839,677,283 and 54,003,132 shares of capital stock issued and outstanding)
(Note 3)....................................................................... $ 15.55
Maximum sales charge (4.75%* of offering price)................................ .78
----------------
Maximum offering price to public............................................... $ 16.33
================
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$216,592,629 and 13,929,963 shares of capital stock issued and outstanding)
(Note 3)....................................................................... $ 15.55
================
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$11,211,012 and 721,187 shares of capital stock issued and outstanding)
(Note 3)....................................................................... $ 15.55
================
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-47
<PAGE> 127
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
<S> <C>
Investment Income:
Interest.................................................................................. $ 52,794,623
----------------
Expenses:
Investment Advisory Fee (Note 2).......................................................... 3,765,225
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of
$1,535,503, $1,796,842, $61,766 and $834, respectively) (Note 6) ....................... 3,394,945
Shareholder Services (Note 2) ............................................................ 847,159
Legal (Note 2)............................................................................ 54,760
Trustees Fees and Expenses (Note 2)....................................................... 46,069
Amortization of Organizational Expenses (Note 1).......................................... 17,688
Other..................................................................................... 892,083
----------------
Total Expenses........................................................................ 9,017,929
Less Expenses Reimbursed.............................................................. 13,125
----------------
Net Expenses.......................................................................... 9,004,804
----------------
Net Investment Income................................................................. $ 43,789,819
================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales..................................................................... $ 466,580,640
Cost of Securities Sold (Including reorganization and restructuring costs of $207,213).. (479,588,928)
----------------
Net Realized Loss on Investments (Including realized loss on closed and expired option
and futures transactions of $832,026 and $18,905,655, respectively)..................... (13,008,288)
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................................................. (13,135,218)
End of the Period (Including unrealized appreciation on open futures transactions of
$358,369)............................................................................. 95,777,573
----------------
Net Unrealized Appreciation on Investments During the Period.............................. 108,912,791
----------------
Net Realized and Unrealized Gain on Investments........................................... $ 95,904,503
================
Net Increase in Net Assets from Operations................................................ $ 139,694,322
================
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 128
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.............................................. $ 43,789,819 $ 41,288,571
Net Realized Loss on Investments................................... (13,008,288) (15,519,375)
Net Unrealized Appreciation/Depreciation on Investments During the
Period........................................................... 108,912,791 (76,400,277)
---------------- ----------------
Change in Net Assets from Operations .............................. 139,694,322 (50,631,081)
---------------- ----------------
Distributions from Net Investment Income........................... (43,561,521) (41,020,921)
Distributions in Excess of Net Investment Income (Note 1).......... (826,976) -0-
---------------- ----------------
Distributions from and in Excess of Net Investment Income*......... (44,388,497) (41,020,921)
---------------- ----------------
Net Change in Net Assets from Investment Activities................ 95,305,825 (91,652,002)
---------------- ----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold.......................................... 406,337,419 76,732,460
Net Asset Value of Shares Issued Through Dividend Reinvestment..... 23,081,168 21,110,678
Cost of Shares Repurchased......................................... (116,597,602) (116,770,207)
---------------- ----------------
Net Change in Net Assets from Capital Transactions................. 312,820,985 (18,927,069)
---------------- ----------------
Total Increase/Decrease in Net Assets.............................. 408,126,810 (110,579,071)
Net Assets:
Beginning of the Period............................................ 659,354,114 769,933,185
---------------- ----------------
End of the Period (Including undistributed net investment income
of $(553,439) and $(228,298), respectively) ..................... $ 1,067,480,924 $ 659,354,114
---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares.......................................... $ (34,867,726) $ (32,205,506)
Class B Shares.......................................... (9,177,676) (8,547,628)
Class C Shares.......................................... (313,688) (212,571)
Class D Shares.......................................... (29,407) (55,216)
---------------- ----------------
$ (44,388,497) $ (41,020,921)
================ ================
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 129
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------
Class A Shares 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period............................... $ 14.261 $ 16.164 $ 15.310 $ 15.071 $ 14.250
--------- --------- --------- --------- ---------
Net Investment Income................................................ .874 .886 .964 1.041 1.066
Net Realized and Unrealized Gain/Loss on Investments................. 1.296 (1.907) .862 .374 .853
--------- --------- --------- --------- ---------
Total from Investment Operations....................................... 2.170 (1.021) 1.826 1.415 1.919
--------- --------- --------- --------- ---------
Less:
Distributions from and in Excess of Net Investment Income (Note 1)... .882 .882 .972 1.044 1.098
Distributions from and in Excess of Net Realized Gain on Investments
(Note 1) .......................................................... -0- -0- -0- .132 -0
--------- --------- --------- --------- ---------
Total Distributions.................................................... .882 .882 .972 1.176 1.098
--------- --------- --------- --------- ---------
Net Asset Value, End of the Period..................................... $ 15.549 $ 14.261 $ 16.164 $ 15.310 $ 15.071
========= ========= ========= ========= =========
Total Return*.......................................................... 15.61% (6.37%) 12.20% 9.69% 13.98%
Net Assets at End of the Period (In millions).......................... $ 839.7 $ 495.8 $ 597.6 $ 463.6 $ 293.7
Ratio of Expenses to Average Net Assets*............................... .99% .99% .87% .86% .59%
Ratio of Net Investment Income to Average Net Assets*.................. 5.86% 5.93% 6.08% 6.76% 7.29%
Portfolio Turnover..................................................... 60.75% 74.96% 81.78% 91.57% 105.99%
*If certain expenses had not been assumed by VKAC, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets................................ .99% N/A .98% 1.00% 1.07%
Ratio of Net Investment Income to Average Net Assets................... 5.86% N/A 5.97% 6.62% 6.81%
</TABLE>
N/A = Not Applicable
See Notes to Financial Statements
B-50
<PAGE> 130
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
August 24, 1992
Year Ended December 31 (Commencement of
----------------------------------- Distribution) to
Class B Shares 1995 1994 1993 December 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........................ $ 14.261 $ 16.139 $ 15.308 $ 15.481
---------- ---------- ---------- ----------
Net Investment Income......................................... .762 .780 .852 .320
Net Realized and Unrealized Gain/Loss on Investments.......... 1.294 (1.890) .845 (.033)
---------- ---------- ---------- ----------
Total from Investment Operations................................ 2.056 (1.110) 1.697 .287
---------- ---------- ---------- ----------
Less:
Distributions from and in Excess of Net Investment Income
(Note 1).................................................... .768 .768 .866 .328
Distributions from and in Excess of Net Realized Gain on
Investments (Note 1)....................................... -0- -0- -0- .132
---------- ---------- ---------- ----------
Total Distributions............................................. .768 .768 .866 .460
---------- ---------- ---------- ----------
Net Asset Value, End of the Period.............................. $ 15.549 $ 14.261 $ 16.139 $ 15.308
========== ========== ========== ==========
Total Return*................................................... 14.74% (6.96%) 11.33% 1.90%**
Net Assets at End of the Period (In millions)................... $ 216.6 $ 158.7 $ 168.2 $ 48.4
Ratio of Expenses to Average Net Assets*........................ 1.73% 1.70% 1.65% 1.66%
Ratio of Net Investment Income to Average Net Assets*........... 5.09% 5.22% 5.19% 5.23%
Portfolio Turnover.............................................. 60.75% 74.96% 81.78% 91.57%
*If certain expenses had not been assumed by VKAC, total return
would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets......................... 1.73% N/A 1.73% 2.42%
Ratio of Net Investment Income to Average Net Assets ........... 5.09% N/A 5.11% 4.48%
</TABLE>
**Non-Annualized
N/A = Not Applicable
See Notes to Financial Statements
B-51
<PAGE> 131
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
August 13, 1993
(Commencement of
Year Ended Year Ended Distribution) to
Class C Shares December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................................. $ 14.262 $ 16.141 $ 15.990
--------- ----------- ----------
Net Investment Income................................................... .771 .783 .300
Net Realized and Unrealized Gain/Loss on Investments.................... 1.280 (1.894) .171
--------- ----------- ----------
Total from Investment Operations.......................................... 2.051 (1.111) .471
Less Distributions from and in Excess of Net Investment Income (Note 1). .768 .768 .320
--------- ----------- ----------
Net Asset Value, End of the Period........................................ $ 15.545 $ 14.262 $ 16.141
========= =========== ==========
Total Return.............................................................. 14.74% (6.97%) 2.96%*
Net Assets at End of the Period (In millions)............................. $ 11.2 $ 3.9 $ 4.1
Ratio of Expenses to Average Net Assets** ................................ 1.72% 1.74% 1.85%
Ratio of Net Investment Income to Average Net Assets**.................... 5.24% 5.19% 3.95%
Portfolio Turnover........................................................ 60.75% 74.96% 81.78%
</TABLE>
*Non-Annualized
**The Ratios of Expenses to Average Net Assets were not affected by the
assumption of expenses by VKAC.
See Notes to Financial Statements
B-52
<PAGE> 132
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen American Capital Municipal Income Fund (the "Fund") is organized as
a series of the Van Kampen American Capital Tax Free Trust, a Delaware business
trust, and is registered as a diversified open-end management investment
company under the Investment Company Act of 1940, as amended. The Fund's
investment objective is to provide a high level of current income exempt from
federal income tax, consistent with preservation of capital. The Fund commenced
investment operations on August 1, 1990. The distribution of the Fund's Class B
and Class C shares commenced on August 24, 1992 and August 13, 1993,
respectively. On July 6, 1995, all Class D shareholders redeemed their shares
and the class was eliminated. The Fund will no longer offer Class D shares.
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" or "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 and Expenses-Interest income and expenses are recorded on
an accrual basis. Bond premium and original issue discount are amortized over
the expected life of each applicable security.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. Organizational Expenses-The Fund has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred
in connection with the Fund's organization in the amount of $152,425. These
costs were amortized over the 60 month period ending July 31, 1995.
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, 1995, the Fund had an accumulated capital loss
carryforward for tax purposes of $43,018,622. Of this amount, $2,340,989,
$30,738, $15,509, $12,455,739, $7,698,483 and $20,477,164 will expire on
December 31, 1996, 1998, 2000, 2001, 2002 and 2003, respectively. Net realized
B-53
<PAGE> 133
Notes to Financial Statements (Continued)
December 31, 1995
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. Permanent book and tax differences relating to the recognition of
expenses associated with fund mergers (see note 3) totaling $300,500 have been
reclassified from accumulated undistributed net investment income to capital.
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
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, 1995, the Fund recognized expenses of
approximately $203,900 representing VKAC's cost of providing accounting, cash
management, legal and certain shareholder services (prior to July, 1995) to the
Fund.
In July, 1995, the Fund began using ACCESS Investor Services, Inc., an
affiliate of the Adviser, as the transfer agent of the Fund. For the year ended
December 31, 1995, the Fund recognized expenses of approximately $379,500,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
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. The Fund's liability under the
deferred compensation and retirement plans at December 31, 1995, was
approximately $66,700.
At December 31, 1995, VKAC owned 100 shares of Class C.
B-54
<PAGE> 134
Notes to Financial Statements (Continued)
December 31, 1995
3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C
each with a par value of $.01 per share. There are an unlimited number of
shares of each class authorized.
At December 31, 1995, capital aggregated $793,389,808, $211,460,358 and
$10,860,415 for Classes A, B and C, respectively. For the year ended December
31, 1995, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- -------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................... 24,431,223 $ 346,409,490
Class B...................... 3,801,812 52,179,384
Class C...................... 533,838 7,748,545
Class D...................... -0- -0-
---------- -------------
Total Sales.................... 28,766,873 $ 406,337,419
========== =============
Dividend Reinvestment:
Class A...................... 1,177,039 $ 17,764,127
Class B...................... 338,749 5,104,906
Class C...................... 12,019 181,673
Class D...................... 2,041 30,462
---------- -------------
Total Dividend Reinvestment.... 1,529,848 $ 23,081,168
========== =============
Repurchases:
Class A...................... (6,373,222) $ (93,894,378)
Class B...................... (1,339,250) (20,151,942)
Class C...................... (94,687) (1,432,423)
Class D...................... (70,940) (1,118,859)
---------- -------------
Total Repurchases.............. (7,878,099) $(116,597,602)
========== =============
</TABLE>
B-55
<PAGE> 135
Notes to Financial Statements (Continued)
December 31, 1995
At December 31, 1994, capital 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>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
----------------------
Year of Redemption Class B Class C
- -------------------------------------------------
<S> <C> <C>
First...................... 4.00% 1.00%
Second..................... 3.75% None
Third...................... 3.50% None
Fourth..................... 2.50% None
Fifth...................... 1.50% None
Sixth...................... 1.00% None
Seventh and Thereafter..... None None
</TABLE>
For the year ended December 31, 1995, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$91,300 and CDSC on the redeemed shares of Classes B, C and D of approximately
$442,300. Sales charges do not represent expenses of the Fund.
B-56
<PAGE> 136
Notes to Financial Statements (Continued)
December 31, 1995
On September 22, 1995, the Fund acquired all of the assets and liabilities of
the Van Kampen American Capital Municipal Bond Fund (the "AC Fund"), through a
tax free reorganization approved by AC Fund shareholders on September 21, 1995.
The Fund issued 20,054,672, 2,774,312 and 471,489 shares of Classes A, B and C
valued at $301,019,346, $41,842,606 and $7,076,761, respectively, in exchange
for AC Fund's net assets. Included in these net assets was a capital loss
carryforward of $4,423,474 which is included in accumulated net realized
gain/loss on investments and cumulative book and tax basis differences related
to expenses not yet deductible for tax purposes of $26,963 which is a component
of undistributed net investment income. Shares issued in connection with this
reorganization are included in common share sales for the current period.
Combined net assets on the date of acquisition were $1,027,309,801.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes and reorganization and restructuring costs, for the year ended
December 31, 1995, were $772,434,581 and $479,381,715, 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.
Transactions in options for the year ended December 31, 1995, were as
follows:
<TABLE>
<CAPTION>
Contracts Premium
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994..... -0- $ -0-
Options Written and Purchased
(Net).............................. 16,260 (9,107,396)
Options Terminated in Closing
Transactions (Net)................. (8,001) 6,083,509
Options Expired (Net)................ (5,209) 2,050,050
Options Exercised (Net).............. (3,050) 973,837
------ -----------
Outstanding at December 31, 1995..... -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
B-57
<PAGE> 137
Notes to Financial Statements (Continued)
December 31, 1995
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, 1995, were
as follows:
<TABLE>
<CAPTION>
Contracts
- ------------------------------------------------
<S> <C>
Outstanding at December 31, 1994..... 19,084
Futures Opened....................... 34,228
Futures Closed....................... (52,212)
--------
Outstanding at December 31, 1995..... 1,100
========
</TABLE>
The futures contracts outstanding at December 31, 1995, and the descriptions
and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
- --------------------------------------------------------------
<S> <C> <C>
Five-year U.S. Treasury Note Futures
Mar 1996 - Sells to Open............ 700 $(585,298)
U.S. Treasury Bond Futures
Mar 1996 - Buys to Open............. 400 943,667
----- ---------
1,100 $ 358,369
===== =========
</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, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% for Class A and 1.00% each for
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $1,409,000.
B-58
<PAGE> 138
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
January 30, 1996
<PAGE> 139
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
JANUARY 30, 1996
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated January 30,
1996. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, IL 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GENERAL INFORMATION................................................................... B-2
MUNICIPAL SECURITIES.................................................................. B-2
TEMPORARY INVESTMENTS................................................................. B-7
REPURCHASE AGREEMENTS................................................................. B-8
FUTURES CONTRACTS AND RELATED OPTIONS................................................. B-8
INVESTMENT RESTRICTIONS............................................................... B-11
TRUSTEES AND EXECUTIVE OFFICERS....................................................... B-13
INVESTMENT ADVISORY AGREEMENT......................................................... B-19
DISTRIBUTOR........................................................................... B-20
DISTRIBUTION PLANS.................................................................... B-20
TRANSFER AGENT........................................................................ B-22
PORTFOLIO TURNOVER.................................................................... B-22
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. B-22
DETERMINATION OF NET ASSET VALUE...................................................... B-23
PURCHASE AND REDEMPTION OF SHARES..................................................... B-23
EXCHANGE PRIVILEGE.................................................................... B-27
CHECK WRITING PRIVILEGE............................................................... B-27
FEDERAL TAX INFORMATION............................................................... B-28
TEXAS TAX INFORMATION................................................................. B-31
FUND PERFORMANCE...................................................................... B-31
OTHER INFORMATION..................................................................... B-32
FINANCIAL STATEMENTS.................................................................. B-32
APPENDIX.............................................................................. B-33
</TABLE>
B-1
<PAGE> 140
GENERAL INFORMATION
Van Kampen American Capital Texas Tax Free Income Fund, formerly known as
American Capital Texas Municipal Securities, Inc. (the "Fund"), was originally
organized as a Maryland corporation on September 6, 1991 as American Capital
Texas Municipal Bond Fund, Inc. On February 18, 1992, the name of the Fund was
changed to American Capital Texas Municipal Securities, Inc. and reorganized
under the laws of Delaware on August 26, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, was a wholly-owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, VKAC manages or supervises more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
As of January 12, 1996, no person was known by management to own
beneficially or of record as much as five percent of the outstanding shares of
any portfolio except the following:
<TABLE>
<CAPTION>
CLASS PERCENTAGE
NAME AND ADDRESS AMOUNT AND NATURE OF OF
OF HOLDER OF OWNERSHIP SHARES OWNERSHIP
- ---------------------------------- ------------------------- -------- ----------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner 37,356 shares of record Class B 5.39%
4800 Deer Lake Dr. East, 3rd Floor 37,288 shares of record Class C 31.80%
Jacksonville, FL 32246-6484
Smith Barney Inc. 110,439 shares of record Class A 9.12%
388 Greenwich Street, 11th Floor 56,363 shares of record Class C 48.07%
New York, NY 10013-2375
</TABLE>
MUNICIPAL SECURITIES
The Fund invests, under normal market conditions, at least 80% of its net
assets in obligations issued by or on behalf of the states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from federal income tax ("Municipal Securities").
Municipal Securities include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development obligations are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Securities
if the interest paid
B-2
<PAGE> 141
thereon is exempt from federal income tax. Municipal Securities also include
short-term tax-exempt municipal obligations such as tax anticipation notes, bond
anticipation notes, revenue anticipation notes, and variable rate demand notes.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or other specific
revenue source such as from the user of the facility being financed. Industrial
development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund may also
include "moral obligation" bonds which are normally issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of such bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund's missing the
opportunity of obtaining a price considered to be advantageous.
The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper provided that such obligations have the ratings
described in the Prospectus or if non-rated are of comparable quality as
determined by the Adviser. Demand notes are obligations which normally have a
stated maturity in excess of one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified number
of days' notice to the noteholders. Demand notes may also include Municipal
Securities subject to a Stand-By Commitment as described in the Prospectus. The
interest rate on a demand note may be based on a known lending rate, such as a
bank's prime rate, and may be adjusted when such rate changes, or the interest
rate on a demand note may be a market rate that is adjusted at specified
intervals. Participation interests in variable rate demand notes will be
purchased only if in the opinion of counsel interest income on such interests
will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Securities are dependent on a variety of factors,
including the general condition of the money market and of the municipal bond
market, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. The ability of the Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities in which the Fund invests to meet their obligations for the
payment of interest and principal when due. There are variations in the risks
involved in holding Municipal Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the obligations
of the issuers of such Municipal Securities may be subject to applicable
bankruptcy, insolvency and similar laws and court decisions affecting the rights
of creditors generally, and such laws, if any, which may be enacted by Congress
or state legislatures imposing a moratorium on the payment of principal and
interest or imposing other constraints or conditions on the payments of
principal of and interest on Municipal Securities.
ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES
Up to 20% of the Municipal Securities purchased by the Fund may be
obligations rated BB or lower by Standard & Poor's Corporation ("S&P") and
Moody's Investor Service ("Moody's") or non-rated obligations which in the
opinion of the Adviser are of comparable quality ("high yield securities"). See
Appendix -- "Ratings of Investments" for additional information regarding
ratings of debt securities.
B-3
<PAGE> 142
High yield securities are considered by S&P and Moody's to have varying
degrees of speculative characteristics. Consequently, although high yield
securities can be expected to provide higher yields, such securities may be
subject to greater market price fluctuations and risk of loss of principal than
lower yielding, higher rated debt securities. Investments in high yield
securities will be made only when, in the judgment of the Adviser, such
securities provide attractive total return potential relative to the risk of
such securities, as compared to higher quality debt securities. The Fund will
not invest in obligations which are not currently paying interest or which are
rated C (lowest grade by Moody's) or which are rated C or D by S&P or which are
non-rated obligations considered by the Adviser to be of comparable quality. The
Fund does not intend to purchase debt securities that are in default or which
the Adviser believes will be in default.
Issuers or obligors of high yield securities may be highly leveraged and
may not have available to them more traditional methods of financing. Therefore,
the risks associated with acquiring the securities of such issuers or obligors
generally are greater than is the case with higher rated securities. For
example, during an economic downturn or a sustained period of rising interest
rates, issuers or obligors of high yield securities may be more likely to
experience financial stress, especially if such issuers or obligors are highly
leveraged. In addition, the market for high yield municipal securities is
relatively new and has not weathered a major economic recession, and it is
unknown what effects such a recession might have on such securities. During such
periods, such issuers may not have sufficient revenues to meet their interest
payment obligations. The issuer's ability to service its debt obligations also
may be adversely affected by specific issuer developments, or the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by the issuer is
significantly greater for the holders of high yield securities because such
securities may be unsecured and may be subordinated to other creditors of the
issuer.
High yield securities frequently have call or redemption features that
would permit an issuer to repurchase the security from the Fund. If a call were
exercised by the issuer during a period of declining interest rates, the Fund
likely would have to replace such called security with a lower yielding
security, thus decreasing the net investment income to the Fund and dividends to
shareholders.
The Fund may have difficulty disposing of certain high yield securities
because there may be a thin trading market for such securities. Because not all
dealers maintain markets in all high yield securities, there is no established
secondary market for many of these securities, and the Fund anticipates that
such securities could be sold only to a limited number of dealers or
institutional investors. To the extent that a secondary trading market for high
yield securities does exist, it is generally not as liquid as the secondary
market for higher rated securities. Reduced secondary market liquidity may have
an adverse impact on market price and the Fund's ability to dispose of
particular issues when necessary to meet the Fund's liquidity needs or in
response to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
securities also may make it more difficult for the Fund to obtain accurate
market quotations for purposes of valuing the Fund's portfolio. Market
quotations are generally available on many high yield securities only from a
limited number of dealers and may not necessarily represent firm bids of such
dealers or prices for actual sales.
It is expected that a significant portion of the high yield securities
acquired by the Fund will be purchased upon issuance, which may involve special
risks because the securities so acquired are new issues. In such instances the
Fund may be a substantial purchaser of the issue and, therefore, have the
opportunity to participate in structuring the terms of the offering. Although
this may enable the Fund to seek to protect itself against certain of such
risks, the considerations discussed herein would nevertheless remain applicable.
Adverse publicity and investor perceptions, which may not be based on
fundamental analysis, also may decrease the value and liquidity of high yield
securities, particularly in a thinly traded market. Factors adversely affecting
the market value of high yield securities are likely to adversely affect the
Fund's net asset value. In addition, the Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default on a portfolio
holding or participate in the restructuring of the obligation.
The Fund will take such actions as it considers appropriate in the event of
anticipated financial difficulties, default or bankruptcy of either the issuer
or any Municipal Securities owned by the Fund or the underlying source of funds
for debt service. Such action may include retaining the services of various
persons
B-4
<PAGE> 143
and firms to evaluate or protect any real estate, facilities or other assets
securing any such obligation or acquired by the Fund as a result of any such
event. The Fund incurs additional expenditures in taking protective action with
respect to Fund obligations in default and assets securing such obligations.
Investment in lower rated Municipal Securities are not generally meant for
short-term investment.
TEXAS SECURITIES
At least 65% of the Fund's total assets will be invested in Municipal
Securities issued by the State of Texas (the "State"), its agencies,
instrumentalities, and political subdivisions, and local governments of the
State ("Texas Securities"). Texas Securities could include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc. and industrial development and pollution control bonds.
The following information is from reports of state officials included in
official statements prepared in connection with Texas Securities and other
public records that are believed to be accurate. The Fund has not independently
verified this information.
The State is the second largest by size among the states of the United
States, covering approximately 266,807 square miles. It contains Houston,
Dallas, and San Antonio, which are respectively, the fourth, eighth, and ninth
largest cities by population in the United States. Texas' gross state product
accounts for more than 7% of the total economy of the United States. Because the
economic bases differ from region to region, economic developments, such as the
strength of the U.S. economy, a decline in oil prices, or changes in defense
spending, can be expected to affect the economy of each region differently.
Since 1990, Texas has added more jobs than any other state, accounting for
one-eighth of the nation's total job growth. The annual rate of employment
growth has risen during each of the past four years and presently ranks around
sixth among all states. Over the twelve months ending in September 1995, Texas
gained more than 235,000 jobs, an increase of 3%, based on information from the
U.S. Bureau of Labor Statistics and the Texas Employment Commission. Nonfarm
employment has grown nearly 13% since 1990 and reached an all-time high of 8.06
million in September 1995.
The state's unemployment rate fell more than two percentage points from
1992 to 1995. Since reaching nearly 8% in 1992, the unemployment rate improved
to below 6% in 1995. Approximately 95% of the new jobs added in the past year
are in the services sector.
Wholesale and retail trade play a significant part in the State's economy.
Houston has the second busiest port in the United States and ranks first in
import trade. Dallas/Ft. Worth is a major regional distribution center, serving
Texas and a number of surrounding states. Because of the State's proximity to
Mexico, international trade plays an important role in the Texas economy.
Several major U.S. corporations have established "sister plant" operations along
the Texas-Mexico border in which goods are partly manufactured in a plant in
Mexico and partly in a plant in the United States. The U.S. free trade agreement
with Mexico and Canada, the North American Free Trade Agreement ("NAFTA") took
effect in 1994. Texas gains proportionately more from NAFTA than the U.S. at
large, but the 1995 recession in the Mexican economy also has more negative
effects in Texas than nationwide. Exports to Mexico comprised 40% of all Texas
exports, and Texas accounted for 47% of the nation's exports to Mexico in 1994.
Exports from Texas to Mexico were up to 17% in 1994, and because of strong
activity among "sister plants," the effect of Mexico's recession on Texas has
been muted. Exports for 1995 are down only slightly.
The manufacturing segment of the state's economy is diversified, but the
most important sectors are those dealing with high technology manufacturing and
the recovery and processing of the state's natural resources. Petroleum-related
manufacturing, including oil-field machinery, petrochemicals and petroleum
refining, account for about 13% of total manufacturing employment. This has
dropped from 19% in the early 1980s with increasing diversification outside of
energy-related manufacturing. The high-technology industries employ about 30% of
all manufacturing workers, despite recent losses related to cutbacks in U.S.
defense expenditures. Exports of computers and electronics totaled $22.4 billion
in 1994, and account for over 37% of the state's total exports.
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Combined, Texas' manufacturing and construction industries have experienced
job growth of 6.7% over the past two years, for a rate nearly equal to the
growth of the service-producing sectors. Texas added a net of 90,400 jobs in the
goods-producing industries from September 1993 to September 1995, despite the
losses of over 12,000 oil and gas jobs and another 8,000 defense-related
aerospace jobs. Most of the 38,000 jobs added in manufacturing have been in the
relatively healthy computer and electronics industries and in construction-
related manufacturing, such as lumber and wood products, stone/clay/glass, and
fabricated metals.
Since the fall of 1993, construction has been the state's fastest-growing
industry, with employment growth of 6% from September 1994 to September 1995.
Residential building permits throughout the state and its major metropolitan
areas have risen at double-digit annual rates since 1990. Total residential
building permits rose from 40,916 in 1989 to 76,144 in 1993 and 94,000 in 1994.
Through the first three quarters of 1995, housing permits are 8.5% above those
in the same period of 1994. The increases in recent years are attributed in
large part to lower mortgage rates and net in-migration, with most of the
increase being in single-family residential building. Multi-family building
activity has begun to follow suit, with the number of starts more than doubling
from 11,600 in 1993 to 27,000 in 1994.
Overall, Texas financial institutions have been profitable in the 1990s.
Net bank income was $657 million in 1990, $1.1 billion in 1991, $2.0 billion in
1992, $2.4 billion in 1993, and $1.9 billion in 1994. Texas banks had total
assets of $188.124 billion in 1994, and the ratio of net income to net assets
represented an annualized return on assets of over 1%.
Consolidation of banks and other financial institutions is ongoing. As a
result of a trend toward larger banks with multiple branches, Texas now has
fewer than 1,000 operating banks, with 951 in June 1995. This is down from 1,125
at the beginning of 1992. It is expected that the number of banking
organizations in the state will continue to shrink, although the number of
branch locations will rise.
The trend toward consolidations has been even more prevalent in the savings
and loan industry. Texas had only 61 state and federal savings and loans in
operation at the beginning of 1995, although profits have been healthy since
1991. Texas savings and loans were profitable (92 percent of them in March 1995,
according to Sheshunoff Information Services), with a return on assets of 0.88%
at the end of 1994.
Twenty-seven state thrifts had assets of $9.8 billion, and 34 federal
thrifts has assets of $46.8 billion.
The State of Texas has long been identified with the oil and gas industry,
but the Texas economy has diversified. In 1981, drilling, production, refining,
chemicals, and energy-related manufacturing accounted for 25% of the State's
total output of goods and services. Currently, these businesses accounted for
11% of the State's economy. At 154,000 employees, mining has fewer jobs today
than at any time since 1977.
In 1994, agriculture output increased 14% over 1993 and contributed $8.2
billion, or 1.7%, to Texas' gross state product. The Comptroller of Public
Accounts forecasted that agriculture would contribute $8.6 billion in 1995, an
increase of 4% over the previous year. While the percent of total output is
relatively small, the State is second in agricultural income in the nation and
agriculture's economic impact affects all regions of the State. Estimated gross
receipts from all agricultural enterprises totaled over $12.8 billion in 1994
and have averaged over $10.9 billion annually during the last ten years. The
State typically leads the nation in the production of livestock and cotton, in
addition to being a major producer of peanuts and rice.
NAFTA is expected to enhance Texas' exports of beef, corn, cotton, rice,
sorghum and wheat, as well as consumer oriented food products. In the global
marketplace, Texas ranks first in agricultural exports to Mexico and is third
among other states in total agricultural exports.
Per capita personal income in Texas in 1995 stood at approximately $20,375,
compared to a national average of $22,346. The rate of growth in personal income
in Texas exceeded the national average from 1990 through 1993 and in 1995.
Between April 1990 and July 1994, the State's population grew by an average of
1.9 percent per year, compared to U.S. growth of 1.1 percent per year. The
Comptroller's office estimates migration accounted for 58 percent of the
1990-1994 growth. The median age of the State's population was 31.9 years in
1994, as compared to 34 years for the United States. According to the 1990
census, 72.1% of the State's population 25 years of age and older has completed
four or more years of high school, as compared to
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an average of 75.2% for the nation. Only one other state, California, has a
larger Hispanic population than Texas.
Due to the state's expansion in Medicaid spending and other Health and
Human Services programs requiring federal matching revenues, federal receipts
became the state's number one source of income in fiscal 1995. Sales tax, which
had been the main source of revenue for the previous 12 years prior to fiscal
1993, was second. Licenses, fees, fines and penalties are now the third largest
revenue source to the state, with motor fuels taxes and motor vehicle
sales/rental taxes following as fourth largest and fifth largest, respectively.
The remainder of the states' revenues are derived primarily from interest and
investment income, lottery proceeds, cigarette and tobacco, franchise, oil and
gas severance and other taxes. The state has no personal or corporate income
tax, although the state does impose a corporate franchise tax based on the
amount of a corporation's capital and "earned surplus," which includes corporate
net income and officers' and directors' compensation.
Before the 74th Legislature adjourned on May 29, 1995, a state budget
totaling $79.9 billion had passed, including $45.1 billion in general revenue
related funds. This general revenue related amount includes $1.0 billion in
revenues from consolidated accounts losing their dedication. The actions of the
74th Legislature coupled with improved economic activity enabled the Comptroller
to certify that sufficient revenue will be available to pay for the state's
1996-97 budget. The State of Texas finished fiscal year 1995 with a $2.110
billion positive cash balance in the General Revenue Fund. This was the eighth
consecutive year that Texas ended a fiscal year with a positive balance in the
General Revenue Fund.
The State of Texas has issued general obligation and revenue bonds for
various purposes. The principal amount per capita of general obligation bonds
and revenue bonds payable from the General Revenue Fund (including general
obligation bonds which, although legally secured by the State's taxing
authority, are expected to be repaid with sources outside the General Revenue
Fund) has increased from $186.54 in 1991 to $288.40 in 1995.
On May 31, 1993, the Texas governor signed a comprehensive legislative
revision to the school finance provisions of the Texas Education Code. The
legislative revisions resulted from a series of court decisions commonly
referred to as Edgewood v. Kirby, in which Texas courts have declared the Texas
school finance system unconstitutional under Texas law. Generally, the courts
declared the school finance system unconstitutional because there must be a
"direct and close correlation between a district's tax effort and the
educational resources available to it," and because districts must have
"substantially equal access to similar revenues per pupil at similar levels of
tax effort."
On January 30, 1995, the Texas Supreme Court issued an opinion which upheld
all provisions of the legislative revision. The Court suggested, however, that
further changes may be needed in the near future to provide equal access to
funding for facility needs. The Court also cautioned of the appearance of a
constitutionally-prohibited state ad valorem tax if all school districts were
effectively forced to tax at the same level.
During its most recent session, the Texas Legislature created a new $170
million school facilities construction funding program targeted at property-poor
school districts. The Legislature also modified the tax rate cap established
under the previous legislative revision. Whether the 1995 legislation satisfies
all constitutional standards for school financing is unknown at this time.
TEMPORARY INVESTMENTS
The taxable securities in which the Fund may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. The Fund may also invest, as temporary investments, in shares of
tax-exempt money market investment companies.
United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following: (a)
the full faith and credit of the United States Government, (b) the right of the
issuer to borrow
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an amount limited to a specific line of credit from the United States
Government, (c) discretionary authority of the United States Government agency
or instrumentality, or (d) the credit of the instrumentality. Such agencies or
instrumentalities include, but are not limited to, the Federal National Mortgage
Association, the Government National Mortgage Association, Federal Land Banks,
and the Farmer's Home Administration. A Fund may not invest in any security
issued by a commercial bank unless the bank is organized and operating in the
United States and has total assets of at least $500 million and is a member of
the Federal Deposit Insurance Corporation.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (securities of the United States Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid security owned by the Fund, exceeds
ten percent of the value of its net assets. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
FUTURES CONTRACTS AND RELATED OPTIONS
FUTURES CONTRACTS
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a price-weighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the
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underlying security or index declines, the position is less valuable, and the
Fund is required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or related options, the Fund could experience delays
and/or losses in liquidating open positions purchased and/or incur a loss of all
or part of its margin deposits with the broker. Transactions are entered into by
the Fund only with brokers or financial institutions deemed creditworthy by the
Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less then the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction judged over a very short time frame.
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There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movements, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in future contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool." CFTC regulations require, among
other things, (i) that futures and related options be used solely for bona fide
hedging purposes (or meet certain conditions as specified in CFTC regulations)
and (ii) that the Fund not enter into futures and related options for which the
aggregate initial margin and premiums exceed five percent of the fair market
value of the Fund's assets. In order to minimize leverage in connection with the
purchase of futures contracts by the Fund, an amount of cash, cash equivalents
or liquid high grade debt securities equal to the market value of the obligation
under the futures contracts (less any related margin deposits) will be
maintained in a segregated account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included in initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
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ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most United States futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of the outstanding shares of the Fund. Such majority is defined by the
1940 Act as the lesser of (i) 67% or more of the voting securities present in
person or by proxy at the meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. In addition to the fundamental
investment limitations set forth in the Prospectus, the Fund shall not:
1. Purchase or hold securities of any issuer if, to the knowledge of the
Fund, any of the Fund's officers or trustees, or officers or directors
of its investment adviser, owns more than 1/2 of 1% of the outstanding
securities of that issuer, and such officers and trustees/directors who
individually own more than such amount together own more than five
percent of the outstanding securities of such issuer.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Fund of an
initial or maintenance margin in connection with futures contracts or
related option transactions is not considered the purchase of a
security on margin.
3. Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire an equal amount of
such securities; provided that this prohibition does not apply to the
writing of options or the sale of futures or related options.
4. Make loans of money or securities to other persons except that the Fund
may purchase or hold debt instruments and enter into repurchase
agreements in accordance with its investment objective and policies.
5. Purchase or sell real estate or invest in mortgage loans (but this
shall not prevent the Fund from investing in Municipal Securities or
Temporary Investments secured by real estate or interests therein);
or in interests in oil, gas, or other mineral exploration or
development programs; or in any security not payable in United States
currency.
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6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including repurchase
agreements maturing in more than seven days.
7. Invest in securities of any one issuer with a record of less than three
years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Securities (except that in the case of industrial
revenue bonds, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid), if such investments by
the Fund would exceed five percent of the value of its total assets
(taken at market value).
8. Underwrite the securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 by virtue
of disposing of portfolio securities.
9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined in the Prospectus), stand-by commitments,
futures contracts described in the next paragraph, and options on such
contracts.
10. Purchase or sell commodities or commodity contracts except that the
Fund may purchase, hold and sell listed futures contracts related to
U.S. Government securities, Municipal Securities or to an index of
Municipal Securities.
11. Borrow money, except that the Fund may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the Fund at
market value at the time of borrowing. Any such borrowing may be
secured provided that not more than ten percent of the total assets of
the Fund at market value at the time of pledging may be used as
security for such borrowings.
12. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall
not apply to tax-exempt securities issued by governmental bodies or
agencies or instrumentalities thereof; so that industrial development
bonds that are considered to be issued by non-governmental users are
subject to this industry limitation.
13. Issue senior securities as defined in the 1940 Act.
Because of the nature of the securities in which the Fund may invest, the
Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies. If a percentage restriction is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in value
will not constitute a violation of such restriction.
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TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital funds.
Age: 63
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndston, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Age: 46 of La Salle National Bank. A Trustee of each of the Van
Kampen American Capital funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital funds.
Age: 76
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and a member of the Investment
Committee of the Joyce Foundation, a private foundation.
A Trustee of each of the Van Kampen American Capital
funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza Adviser, Van Kampen American Capital Investment Advisory
Oakbrook Terrace, IL 60181 Corp. (the "VK Adviser") and Van Kampen American Capital
Age: 53 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc and VKAC. Chief Executive Officer
of McCarthy, Crisanti & Maffei, Inc. Chairman and a
Director of MCM Asia Pacific Company, Ltd. Executive Vice
President and a Trustee of each of the Van Kampen
American Capital funds advised by the Adviser and the VK
Adviser. President of Van Kampen Merritt Series Trust and
the closed-end investment companies advised by the VK Ad-
viser.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital funds and Chairman of each Van Kampen American
Capital fund advised by the VK Adviser.
</TABLE>
B-13
<PAGE> 152
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and VKAC. Chairman, Chief Executive
Houston, TX 77056 Officer and a Director of the Distributor, the Adviser,
Age: 56 the VK Adviser, Van Kampen American Capital Management,
Inc. and Van Kampen American Capital Advisors, Inc.
Chairman, President and a Director of Van Kampen American
Capital Exchange Corporation. Chairman and a Director of
ACCESS and Van Kampen American Capital Trust Company.
Chairman, President and a Director of Van Kampen American
Capital Services, Inc. Chairman and a Director of
McCarthy, Crisanti & Maffei, Inc. President, Chief
Executive Officer and a Trustee of each of the Van Kampen
American Capital funds advised by the Adviser and the VK
Adviser. Director, Trustee or Managing General Partner of
other open-end investment companies and closed-end
investment companies advised by the Adviser. Chairman of
the Board of Van Kampen Merritt Series Trust and the
closed-end investment companies advised by the VK
Adviser.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 73 software programming company specializing in white collar
productivity. Director of Panasia Bank. A trustee of each
of the Van Kampen American Capital funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital funds and Chairman of the Van Kampen American
Capital funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital funds. A Trustee of each of the Van
Age: 56 Kampen American Capital funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
</TABLE>
B-14
<PAGE> 153
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Messrs. Powell and McDonnell are
interested persons of the Adviser and the Fund by reason of their position
with the Adviser. Mr. Whalen is an interested persons of the Adviser and the
Fund by reason of his firm having acted as legal counsel to the Adviser or an
affiliate thereof.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of VKAC, and have
entered into employment contracts (for a term of five years) with VKAC.
The Fund's officers other than Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso,
Martin, Wetherall and Hill are located at 2800 Post Oak Blvd., Houston, TX
77056. Messrs. Hegel, Nyberg, wood, Sullivan, Dalmaso, Martin, Wethrall and
Hill are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
William Brown............ Vice President Senior Vice President of the Adviser. Vice
Age: 42 President of each of the Van Kampen
American Capital funds advised by the
Adviser and the VK Adviser.
Peter W. Hegel........... Vice President Executive Vice President of the Adviser and
Age: 39 the VK Adviser. Vice President of each of
the Van Kampen American Capital funds
advised by the Adviser and the VK Adviser.
Vice President of Van Kampen Merritt Series
Trust and the closed-end funds advised by
the VK Adviser.
Curtis W. Morell......... Vice President and Chief Vice President and Chief Accounting Officer
Age: 49 Accounting Officer of most of the investment companies advised
by the Adviser.
</TABLE>
B-15
<PAGE> 154
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President and Executive Vice President, General Counsel
Age: 42 Secretary and Secretary of Van Kampen American
Capital. Executive Vice President, General
Counsel and a Director of the Distributor.
Executive Vice President and General
Counsel of the Adviser. Secretary of each
of the Van Kampen American Capital funds
advised by the Adviser and the VK Adviser.
Secretary of Van Kampen Merritt Series
Trust and the closed-end funds advised by
the VK Adviser. Director of ICI Mutual
Insurance Co., a provider of insurance to
members of the Investment Company
Institute. Prior to March 1990, Secretary
of Van Kampen Merritt Inc., Van Kampen
American Capital Investment Advisory Corp.
and McCarthy, Crisanti & Maffei, Inc.
Robert C. Peck, Jr....... Vice President Executive Vice President and Director of
Age: 49 the Adviser. Executive Vice President of
the VK Adviser.
Alan T. Sachtleben....... Vice President Executive Vice President and a Director of
Age: 53 the Adviser. Executive Vice President of
the VK Adviser.
Paul R. Wolkenberg....... Vice President Executive Vice President of the Adviser.
Age: 51 President, Chief Executive Officer and a
Director of Van Kampen American Capital
Trust Company and ACCESS.
Edward C. Wood III....... Vice President and Chief Senior Vice President of VK Adviser. Vice
Age: 40 Financial Officer President and Chief Financial Officer of
each of the Van Kampen American Capital
funds advised by the Adviser and the VK
Adviser. Vice President, Treasurer and
Chief Financial Officer of Van Kampen
Merritt Series Trust and the closed-end
funds advised by VK Adviser.
John L. Sullivan......... Treasurer First Vice President of the VK Adviser.
Age: 40 Treasurer of each of the Van Kampen
American Capital funds advised by the
Adviser and the VK Adviser. Controller of
Van Kampen Merritt Series Trust and the
closed-end funds advised by the VK Adviser.
Tanya M. Loden........... Controller Controller of most of the investment
Age: 36 companies advised by the Adviser, formerly
Tax Manager/Assistant Controller.
</TABLE>
B-16
<PAGE> 155
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Nicholas Dalmaso......... Assistant Secretary Assistant Vice President and Senior
Age: 30 Attorney of VKAC. Assistant Secretary of
each of the Van Kampen American Capital
funds advised by the Adviser and the VK
Adviser. Assistant Secretary of Van Kampen
Merritt Series Trust and the closed-end
funds advised by the VK Adviser. Prior to
May 1992, attorney for Cantwell & Cantwell,
a Chicago law firm.
Scott E. Martin.......... Assistant Secretary Senior Vice President, Deputy General
Age: 39 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Adviser, the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen
American Capital funds advised by the
Adviser and the VK Adviser. Assistant
Secretary of Van Kampen Merritt Series
Trust and the closed-end funds advised by
the VK Adviser.
Weston B. Wetherell...... Assistant Secretary Vice President, Associate General Counsel
Age: 39 and Assistant Secretary of VKAC, the
Adviser, the VK Adviser and the
Distributor. Assistant Secretary of each of
the Van Kampen American Capital funds
advised by the Adviser and the VK Adviser.
Assistant Secretary of Van Kampen Merritt
Series Trust and the closed-end funds
advised by VK Adviser.
Perry Farrell............ Assistant Secretary Assistant Treasurer of each of the Van
Age: 59 Kampen American Capital funds advised by
the Adviser and the VK Adviser.
Steven M. Hill........... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 31 Assistant Treasurer of each of the Van
Kampen American Capital funds advised by
the Adviser and the VK Adviser. Assistant
Treasurer of Van Kampen Merritt Series
Trust and the closed-end funds advised by
the VK Adviser.
Robert Sullivan.......... Assistant Controller Assistant Controller of each of the Van
Age: 62 Kampen American Capital funds advised by
the Adviser and the VK Adviser.
</TABLE>
During the last fiscal year ended September 30, 1995, the Trustees who were
not affiliated with the Adviser or its parent received as a group $8,342 in
trustees' fees from the Fund in addition to certain out-of-pocket expenses. Such
trustees also received compensation for serving as directors or trustees of
other investment companies advised by the Adviser as identified in the notes to
the foregoing table. For legal services rendered during the last fiscal year the
Fund paid legal fees of $9,011 to the law firm of O'Melveny & Myers of which
Lawrence J. Sheehan is Of Counsel. The Firm also serves as legal counsel to
other Van Kampen American Capital Funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as trustees is set forth
below. The compensation shown for the Fund is for the most recent fiscal year
and the total compensation shown for the Fund and other related mutual funds is
for the calendar year ended December 31, 1994.
B-17
<PAGE> 156
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM
BENEFITS REGISTRANT
AGGREGATE ACCRUED AS AND FUND
COMPENSATION PART OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES(5) TRUSTEES(6)
- --------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
J. Miles Branagan........................................ $ 940 -0- $64,000
Dr. Richard E. Caruso(3)................................. 920(2) -0- 64,000
Philip P. Gaughan........................................ 150 -0- -0-
Linda H. Heagy........................................... 90 -0- -0-
Dr. Roger Hilsman........................................ 1,000 -0- 66,000
R. Craig Kennedy......................................... 200 -0- -0-
Donald C. Miller......................................... 200 -0- -0-
Jack E. Nelson........................................... -0- -0- -0-
David Rees............................................... 955 -0- 64,000
Jerome L. Robinson....................................... 200 -0- -0-
Lawrence J. Sheehan...................................... 1,000 -0- 67,000
Dr. Fernando Sisto(3).................................... 975 -0- 82,000
Wayne W. Whalen.......................................... 200 -0- -0-
William S. Woodside(4)................................... 940 -0- 18,000
</TABLE>
- ---------------
(1) Mr. Powell, a trustee of the Fund, is an affiliated person of the Adviser
and is not eligible for compensation or retirement benefits from the Fund.
Messrs. Gaughan, Kennedy, Miller, Nelson, Robinson and Whalen were elected
as trustees of the Fund at a shareholders meeting held July 21, 1995. Ms.
Heagy was appointed as a trustee of the Fund at a meeting of the Board of
Trustees on September 7, 1995.
(2) Amount reflects deferred compensation of $920 for Mr. Caruso.
(3) Messrs. Caruso and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund as of September 30,
1995 is as follows: Caruso, $3,937; Sisto, $1,421.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Registrant's adviser. With respect to column 4, $36,000 was paid by the
Adviser directly.
(5) The amounts in this column are the retirement benefits accrued during the
Fund's fiscal year ended September 30, 1995.
(6) As of December 31, 1994, the Fund Complex consisted of 29 mutual funds
advised by the Adviser which had the same members on each funds' Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 29 mutual funds in the Fund Complex
during the calendar year ended December 31, 1994. The Adviser also serves as
investment adviser for other investment companies; however, with the
exception of Mr. Powell, such investment companies do not have the same
trustees as the Fund Complex.
As of January 12, 1996, the trustees and officers as a group own less than
1% of the shares of the Fund.
No officer or trustee of the Fund owns or would be able to acquire 5% or
more of the common stock of VK/AC Holding, Inc.
The Fund will pay trustees who are not affiliated with the Adviser, the
Distributor or VKAC an annual retainer of $629 per year and a meeting fee of $18
per regular quarterly meeting of the Fund, plus expenses. No additional fees are
proposed at the present time to be paid for special meetings, committee meetings
or to the chairman of the board. The trustees have approved an aggregate annual
compensation cap from the combined fund complex of $84,000 per trustee
(excluding any retirement benefits) until December 31, 1996, based upon the
current net assets and the current number of Van Kampen American Capital funds
(except that Mr. Whalen, who is also a trustee of the closed-end funds advised
by an affiliate of the Adviser, would receive additional compensation for
serving as a trustee of such funds). In addition, the Adviser has agreed to
B-18
<PAGE> 157
reimburse the Fund through December 31, 1996 for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objectives. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of the Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial officer and the personnel operating under his direction. The
services are provided at cost which is allocated among the investment companies
advised by the Adviser. The Fund also pays transfer agency fees, distribution
fees, service fees, custodial fees, legal fees, the costs of reports to
shareholders and all other ordinary expenses not specifically assumed by the
Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets at an annual rate of 0.60%
of the first $300 million of the Fund's average net assets, 0.55% of the next
$300 million of the Fund's average net assets and 0.50% of the Fund's average
net assets in excess of $600 million.
The average daily net assets is determined by taking the average of all of
the determinations of the net assets for each business day during a given
calendar month. Such fees are payable for each calendar month as soon as
practicable after the end of that month. The Adviser shall use its best efforts
to recapture all available tender solicitation fees and exchange offer fees in
connection with each of the Fund's transactions and shall advise the Trustees of
the Fund of any other commissions, fees, brokerage or similar payments which may
be possible under applicable laws for the Adviser or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc. to receive in
connection with the Fund's portfolio transactions or other arrangements which
may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the Adviser's monthly compensation will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund an amount sufficient to make up
the deficiency, subject to readjustment during the year. Ordinary business
expenses do not include (1) interest and taxes, (2) brokerage commissions, (3)
payments made pursuant to distribution plans (described herein), and (4) certain
litigation and indemnification expenses as described in the Advisory Agreement.
The Advisory Agreement also provides that the Adviser shall not be liable to the
Fund for any actions or omissions if it acted in good faith without negligence
or misconduct.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities, and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 30 days' written notice.
B-19
<PAGE> 158
During the fiscal years ended September 30, 1993, 1994 and 1995, the
Adviser received $-0-, $-0- and $61,589, respectively, in advisory fees from the
Fund. For such period the Fund paid $67,451, $67,241 and $67,413, respectively,
for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the Fund
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Underwriting Agreement is
renewable from year to year if approved (a) by the Fund's Trustees or by a vote
of a majority of the Fund's outstanding voting securities, and (b) by the
affirmative vote of a majority of Trustees who are not parties to the
Underwriting Agreement or interested persons of any party, by votes cast in
person at a meeting called for such purpose. The Underwriting Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 60 days' written notice. Advantage Capital
Corporation was an affiliated dealer of the Distributor.
During the fiscal years ended September 30, 1993, 1994 and 1995, total
underwriting commissions on the sale of shares of the Fund were $205,498,
$52,218 and $18,330, respectively. Of such total, the amount retained by the
Distributor was $30,599, $7,912 and $2,589, respectively. The remainder was
reallowed to dealers. Of such dealer reallowances, $8,835, $3,346 and $157,
respectively, was received by Advantage Capital Corporation, a former affiliate
of the Fund.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" and "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, Class B Plan and
Class C Plan are sometimes referred to herein collectively as "Plans" and
individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses,
and (6) interest expense at the three-month LIBOR rate plus 1 1/2% compounded
quarterly on the unreimbursed distribution expenses. With respect to the Class C
Plan, authorized payments by the Fund also include payments at an annual rate of
up to 0.75% of the net assets of the Class C shares to reimburse the Distributor
for (1) upfront commissions and transaction fees of up to 0.75% of the purchase
price of Class C shares purchased by the clients of broker-dealers and other
Service Organizations and ongoing commissions and
B-20
<PAGE> 159
transaction fees paid to broker-dealers and other Service Organizations in an
amount up to 0.75% of the average daily net assets of the Fund's Class C shares,
(2) out-of-pocket expenses of printing and distributing prospectuses and annual
and semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including seminars, marketing support
salaries and bonuses, and travel-related expenses, and (6) interest expense at
the three-month LIBOR rate plus 1 1/2% compounded quarterly on the unreimbursed
distribution expenses. Such reimbursements are subject to the maximum sales
charge limits specified by the NASD.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreement and selling group agreement were approved by the Trustees,
including a majority of the Trustees who are not affiliated persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the Trustees determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Fund's Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
the Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by a vote of a majority of the outstanding voting shares of the
respective class. Any change in any of the Plans that would materially increase
the distribution or service expenses borne by the Fund requires shareholder
approval voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plan is in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1995, the Fund's aggregate expenses
under the Class A Plan were $26,331 or 0.22% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. For the fiscal year ended September 30, 1995, the Fund's
aggregate expenses under the Class B Plan were $75,938 or 1.00% of the Class B
shares' average net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $56,954 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class B
shares of the Fund and $18,984 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended September 30, 1995, the Fund's aggregate expenses under the
Class C Plan were $11,528 or 1.00% of the Class C shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $8,646 for commissions and transaction fees paid to broker-dealers and
other Service Organizations in respect of sales of Class C shares of the Fund
and $2,882 for fees paid to Service Organizations for servicing Class C
shareholders and administering the Class C Plan.
B-21
<PAGE> 160
TRANSFER AGENT
During the fiscal year ended September 30, 1995, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund, received fees
aggregating $12,513 for these services. The services of ACCESS are provided at
cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate is shown under
"Financial Highlights" in the Prospectus. The annual turnover rate is not
expected to exceed 100%. A 100% turnover rate would occur if all the Fund's
portfolio securities were replaced during one year.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs except for commissions paid with respect to transactions in
future contracts and options. Portfolio securities are normally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include the spread between the bid and
asked price. Sales to dealers are effected at bid prices.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, consideration may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of the securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of the accounts, and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution of such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Fund and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held, and opinions of the persons responsible
for recommending the investment.
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The Adviser's brokerage practices are monitored and reviewed by the
Trustees. During the fiscal years ended September 30, 1993, 1994 and 1995, the
Fund paid no brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of the Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) on each business day on which
the Exchange is open. The Exchange is currently closed on weekends and on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Trustees. Expenses and fees, including the management fee are
accrued daily and taken into account for the purpose of determining the net
asset value of Fund shares. Short-term instruments having remaining maturities
of 60 days or less are valued at amortized cost.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
The Fund's shares are sold in a continuous offering and may be purchased on
any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
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ACCESS. The minimum initial investment of $500 or more in the Fund, in the form
of a check payable to the Fund, must accompany the application. This minimum may
be waived by the Distributor for plans involving continuing investments.
Subsequent investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of the Fund's shares next
computed following receipt of payment by ACCESS. Confirmations of the opening of
an account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same capacity
so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to the purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a trustee or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating Van Kampen American Capital
mutual funds described in the Prospectus (the "Participating Funds"), which have
been previously purchased and are still owned, plus the shares being purchased.
The current offering price is used to determine the value of all such shares.
If, for example, an investor has previously purchased and still holds Class A
shares of the Fund and/or shares of other Participating Funds having a current
offering price of $50,000 and that person purchases $60,000 of additional Class
A shares of the Fund, the charge applicable to the $60,000 purchase would be
3.75% of the offering price. The same reduction is applicable to purchases under
a Letter of Intent as described in the next paragraph. THE DEALER MUST NOTIFY
THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD
QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR
NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The
reduced sales charge will not be applied if such notification is not furnished
at the time of the order. The reduced sales charge will also not be applied
should a review of the records of the Distributor or ACCESS fail to confirm the
investor's represented holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
still owned, are also included in determining the applicable quantity discount.
A Letter of Intent permits an investor to establish a total investment goal to
be achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. If the Letter of Intent goal is not achieved
within the 13-month period, the investor is required to pay the difference
between sales charges otherwise applicable to the purchases made during this
period and sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrow
shares to obtain such difference. If the goal is exceeded in an amount which
qualifies for a lower sales charge, a price adjustment is made by refunding to
the investor in shares of the Fund, the amount of excess sales charges, if any,
paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefore may be postponed
for more than seven days during any period when (a) the Exchange is closed for
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other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For investments of $1,000,000 or more of Class A shares of the Fund
("Qualified Purchaser"), the front-end sales charge will be waived and a
contingent deferred sales charge ("CDSC -- Class A") of one percent is imposed
in the event of certain redemptions within one year of the purchase. If a
CDSC -- Class A is imposed upon redemption, the amount of the CDSC -- Class A
will be equal to the lesser of one percent of the net asset value of the shares
at the time of purchase, or one percent of the net asset value of the shares at
the time of redemption.
The CDSC -- Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the
Internal Revenue Code (the "Code") and deferred compensation plans under Section
457 of the Code) required to obtain funds to pay distributions to beneficiaries
pursuant to the terms of the plans. Such payments include, but are not limited
to, death, disability, retirement, or separation from service. No CDSC -- Class
A will be imposed on exchanges between funds. For purposes of the CDSC -- Class
A, when shares of one fund are exchanged for shares of another fund, the
purchase date for the shares of the fund exchanged into will be assumed to be
the date on which shares were purchased in the fund from which the exchange was
made. If the exchanged shares themselves are acquired through an exchange, the
purchase date is assumed to carry over from the date of the original election to
purchase shares subject to a CDSC -- Class A rather than a front-end load sales
charge. In determining whether a CDSC -- Class A is payable, it is assumed that
shares held the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund and Van Kampen American Capital Tax Free Money Fund with shares of certain
other participating funds described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
The CDSC -- Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of
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the death or initial determination of disability. This waiver of the
CDSC -- Class B and C applies to a total or partial redemption, but only to
redemptions of shares held at the time of the death or initial determination of
disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge also will be waived on any minimum distribution required to
be distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 120 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC -- Class C to subsequent redemptions.
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(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the Prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signators are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
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FEDERAL TAX INFORMATION
The following is only a summary of certain additional federal, state and
local tax considerations generally affecting the Fund and its shareholders that
are not described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
General. By maintaining its qualification as a "regulated investment
company" under the Code, the Fund will not incur any liability for federal
income taxes to the extent its taxable ordinary income and any capital gain net
income is distributed in accordance with Subchapter M of the Code.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve-months ended December 31, plus 98% of its
capital gain net income for the twelve-months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fee and higher transfer agency fees applicable to the Class B and
Class C shares. By qualifying as a regulated investment company, the Fund is not
subject to federal income taxes to the extent it distributes its taxable net
investment income and taxable net realized capital gains. If for any taxable
year the Fund does not qualify for the special tax treatment afforded regulated
investment companies, all of its taxable income, including any net realized
capital gains, would be subject to tax at regular corporate rates (without any
deduction for distributions to shareholders).
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for the Fund to
be eligible to pay exempt-interest dividends during any taxable year, at the
close of each fiscal quarter, at least 50% of the aggregate value of the Fund's
assets must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
income" (i.e., its ordinary taxable income and the excess, if any, of its net
short-term capital gains over any net long-term capital losses) recognized by
the Fund during the taxable year (the "Distribution Requirements").
Not later than 60 days after the close of its taxable year, the Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
"exempt-interest" dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax exempt during the period covered by the dividend.
Although exempt-interest dividends generally may be treated by Fund
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his or her tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the purchaser would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held the Fund if it is required to qualify as a regulated
investment company as described below. "Substantial user" is defined under U.S.
Treasury Regulations to include a non-exempt person who regularly uses in his or
her trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities
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exceed five percent of the total revenues derived from the facilities by all
users, or who occupies more than five percent of the useable area of the
facilities or for whom the facilities or a part thereof were specifically
constructed, reconstructed or acquired. Examples of "related persons" include
certain related natural persons, affiliated corporations, a partnership and its
partners and an S corporation and its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the shareholder's taxable year. If
a shareholder receives an exempt-interest dividend with respect to any shares
and such shares are held for six months or less, any short-term capital loss on
the sale or exchange of the shares will be disallowed to the extent of the
amount of such exempt-interest dividend.
If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Securities or other assets, the Fund
will have no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held his shares. Not later than 60 days after the close of the Fund's
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.
A capital gain dividend received after the purchase of the shares of the
Fund reduces the net asset value of the shares by the amount of the distribution
and will be subject to income taxes. A loss on the sale of shares held for less
than six months (to the extent not disallowed on account of the receipt of
exempt-interest dividends) attributable to a capital gain dividend is treated as
a long-term capital loss for federal income tax purposes.
Tax Treatment of Futures Contracts and Related Options. In connection with
its operations, the Fund may effect transactions in U.S. Government securities
and municipal bond futures contracts ("Futures Contracts") and in options
thereon ("Futures Options"). Gains or losses recognized by the Fund from
transactions in such Futures Contracts and Futures Options constitute capital
gains and losses for federal income tax purposes and do not therefore qualify as
exempt-interest income.
With respect to a Futures Contract closed out by the Fund, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60% thereof and short-term capital gain or loss to the extent of 40% thereof
(hereinafter "60/40 gain or loss"). Open Futures Contracts held by the Fund at
the end of any fiscal year will be required to be treated as sold at market
value on the last day of such fiscal year for federal income tax purposes (i.e.
"marked-to-market"). Gain or loss recognized under this marked-to-market rule is
60/40 gain or loss. The federal income tax treatment accorded to Futures Options
will be the same as that accorded Futures Contracts. The Distribution
Requirements may limit the Fund's ability to hold Futures Contracts and Futures
Options at the end of a year.
A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined in
Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone a recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period, and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other
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elections are also provided in the Code. No determination has been made whether
the Fund will make any of these elections.
The Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has pointed
out that although the Internal Revenue Service has issued a favorable published
ruling on a similar but not identical situation, it could reach a different
conclusion from that of counsel. Counsel has also advised the Fund that the
Internal Revenue Service presently will not ordinarily issue private letter
rulings regarding the ownership of securities subject to stand-by commitments.
Restrictions on Futures Contracts and Related Options. Among the
requirements for qualification as a regulated investment company under the Code,
the Fund must derive less than 30% of its gross income each year from sales of
securities held for less than three months. This requirement and the
marked-to-market rule may restrict the Fund's ability to: (i) effect closing
purchase transactions in futures contracts and futures options which have been
held for less than three months and (ii) enter into various other short-term
transactions.
In addition, the Code requires that the Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of the Fund's assets may be invested
in the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, the Fund's ability to invest in futures contracts and
futures options may be limited.
Treatment of Dividends. While the Fund expects that a major portion of its
investment income will constitute tax-exempt interest, a significant portion may
consist of "investment company taxable income" and "net capital gains." As
pointed out above, a Fund will be subject to tax for any year on its
undistributed investment company taxable income and net capital gains.
It is anticipated that substantially all of the Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level. Distributions
that are not designated as capital gain dividends will be taxable to
shareholders as ordinary income. Dividends and distributions declared payable to
shareholders of record after September 30 of any year and paid before February 1
of the following year, are considered taxable income to shareholders on the
record date even though paid in the next year.
Since none of the Fund's net investment income will arise from dividends on
common or preferred stock, none of its distributions will be eligible for the
70% dividends received deduction available to corporations. To qualify for the
dividends received deduction, a corporate shareholder must hold the shares on
which the dividend is paid for more than 45 days.
The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision that,
for taxable years beginning after December 31, 1989, 75% of the excess of a
corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of tax
preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund
B-30
<PAGE> 169
that he has provided a correct taxpayer identification number and that he is not
subject to withholding. (An individual's taxpayer identification number is his
social security number.) The 31% "back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.
TEXAS TAX INFORMATION
Dividends and distributions paid by the Fund to Texas residents are not
taxable by Texas because Texas presently has no personal income tax. Therefore,
at the present time, Texas residents enjoy no special State income tax benefits
by investing in the Fund.
The State of Texas does not have a corporate income tax. Under present
laws, the Fund will not be subject to the Texas franchise tax.
The foregoing are only summaries of the applicable provisions of the Code,
Treasury regulations and Texas tax laws presently in effect. For complete
provisions, reference should be made to the pertinent Code sections, Treasury
regulations promulgated thereunder and the Texas tax laws. The Code, Treasury
regulations and Texas tax laws are subject to change by legislative or
administrative action either prospectively or retroactively.
Shareholders are urged to consult their own tax advisers with specific
reference to their own tax situation.
FUND PERFORMANCE
The average annual total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the one-year and the three-years
and seven month periods ended September 30, 1995 was 4.83% and 6.15%,
respectively. The average annual total return (computed in the manner described
in the Prospectus) for Class B shares of the Fund for the one-year and the
three-years and two month periods ended September 30, 1995 was 5.11% and 4.76%,
respectively. The average annual total return (computed in the manner described
in the Prospectus) for Class C shares of the Fund for the one-year and the
two-year and one month periods ended September 30, 1995 was 8.11% and 3.85%,
respectively. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objective and
policies as well as the risks incurred by the Fund's investment practices.
The annualized current yield for Class A, Class B and Class C shares of the
Fund for the 30-day period ending September 30, 1995 was 4.96%, 4.40%, and
4.40%, respectively. The tax equivalent yield based on an assumption of a tax
rate of 36% for the same period for Class A, Class B and Class C shares of the
Fund was 7.75%, 6.87% and 6.86%, respectively. The yield for Class A, Class B
and Class C shares are not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions(SM) and the Van Kampen American Capital Mutual Fund
Index(SM) -- which polls measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Funds' transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to
B-31
<PAGE> 170
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Fund.
OTHER INFORMATION
DIVIDENDS AND DISTRIBUTIONS -- Shareholders are informed as to the sources of
distributions at the time of payment. Any capital gain distribution paid shortly
after a purchase of shares by an investor will have the effect of reducing the
per share net asset value of the shares owned by the amount of the distribution.
See "Distributions from the Fund" in the Prospectus for further information.
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to Shareholders, including the related Report of Independent
Accountants on the September 30, 1995 financial statements, are included in the
Statement of Additional Information.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund on
September 30, 1995.
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995
-------------
<S> <C>
Net Asset Value per Class A Share $10.03
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ 0.50
------
Class A Per Share Offering Price to the Public $10.53
</TABLE>
B-32
<PAGE> 171
APPENDIX
RATINGS OF INVESTMENTS
RATINGS OF MUNICIPAL SECURITIES
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("MOODY'S") MUNICIPAL BOND RATINGS
Aaa -- Securities which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes as can
be visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Securities which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa securities.
A -- Securities which are rated A possess many favorable investment
attributes and are to be considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa -- Securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba -- Securities which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Securities which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of time
may be small.
Caa -- Securities which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca -- Securities which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C -- Securities which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Conditional Rating: Securities for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3
in each generic rating classification from Aa through B in its municipal
bond rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
midrange ranking; and a modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
B-33
<PAGE> 172
Short-term Notes: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable
quality . . . but lacking the undeniable strength of the preceding grades";
MIG 4 notes are of "adequate quality, carrying specific risk but having
protection . . . and not distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories
for variable rate demand obligations ("VRDO's"). VRDO's receive two
ratings. The first rating, depending on the maturity of the VRDO, is
assigned either a bond or MIG rating which represents an evaluation of the
risk associated with scheduled principal and interest payments. The second
rating, designated as "VMIG," represents an evaluation of the degree of
risk associated with the demand feature. The new VRDO's demand feature
ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior
liquidity support, demonstrated access to the market for
refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well
established.
VMIG 4: adequate quality, not predominantly speculative but there is
risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL ("S&P") DEBT RATINGS
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
B-34
<PAGE> 173
III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest-rated issues only in
small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for
debt in higher-rated categories.
<TABLE>
<S> <C>
BB Debt rated "BB," "B," "CCC" or "CC" is regarded, on balance, as predominantly
B speculative with respect to capacity to pay interest and repay principal in
CCC accordance with the terms of the obligation. "BB" indicates the lowest degree of
CC speculation and "CC" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
</TABLE>
C This rating is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that Standard
& Poor's does not rate a particular type of obligation as a matter
of policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designation 1, 2 and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more
vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B-35
<PAGE> 174
B Issues rated "B" are regarded as having only an adequate capacity
for timely payment. However, such capacity may be damaged by
changing conditions or short-term adversities.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three years in
accordance with the same rating scale currently employed for municipal bond
ratings.
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e. different ratings by Moody's and S&P) and dual rated securities
as described above.
B-36
<PAGE> 175
PORTFOLIO OF INVESTMENTS
September 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 98.0%
EDUCATION 5.3%
$ 500 Houston, Texas, Higher Education
Finance Corp., Rev. (University of St.
Thomas Project)........................ 7.250% 12/01/07 $ 519,425
500 North Texas Higher Education Authority,
Inc., Texas Student Loan Rev.,
Refunding, Series D.................... 6.300 04/01/09 512,200
-----------
1,031,625
-----------
HOSPITAL 19.7%
165 Bell County, Texas, Health Facilities
Development Corp. (King's Daughters
Hospital).............................. 9.250 07/01/08 183,127
250 Harris County, Texas, Health Facilities
Development Corp., Health Care System
Rev. (Memorial Hospital System
Project)............................... 7.125 06/01/15 267,642
375 Harris County, Texas, Health Facilities
Development Corp., Health Care System
Rev. (Sisters of Charity).............. 7.100 07/01/21 400,493
90 Jefferson County, Texas, Health
Facility Authority (Baptist Health Care
Project)............................... 8.300 10/01/14 98,023
150 Montgomery County, Texas, Health
Facilities Development Corp., Hospital
Mortgage Rev. (Woodlands Medical Center
Project)............................... 8.850 08/15/14 162,837
500 Richardson, Texas, Hospital Authority,
Refunding & Improvement Rev.
(Richardson Medical Center)............ 6.750 12/01/23 509,880
300 Rusk County, Texas, Health Facility
Corp., Refunding Hospital Rev.
(Henderson Memorial Hospital Project).. 7.750 04/01/13 312,681
500 Tarrant County, Texas, Health Facilities
Development Corp., Refunding &
Improvement, Hospital Rev. (Fort Worth
Osteopathic Hospital).................. 7.000 05/15/28 516,550
250 Texas Health Facilities Development
Corp., Hospital Rev. (Fort Worth
Children's Center) FGIC................ 6.250 12/01/12 257,890
250 Tomball, Texas, Hospital Authority Rev.
Refunding.............................. 6.125 07/01/23 226,290
150 Tyler, Texas, Health Facilities
Development Corp., Refunding Rev. (East
Texas Medical Center-Regional Health)
Series A............................... 8.250 11/01/06 169,356
500 Tyler, Texas, Health Facilities
Development Corp., Refunding Rev. (East
Texas Medical Center-Regional Health)
Series B............................... 6.750 11/01/25 492,995
210 Weslaco, Texas, Health Facilities
Development Corp., Hospital Rev.
(Weslaco Health Facility).............. 10.375 06/01/16 243,415
-----------
3,841,179
-----------
HOUSING 15.2%
500 Austin, Texas, Housing Finance Corp.,
Multi-Family Mtg....................... 6.500 10/01/10 500,375
500 Baytown, Texas, Property Management &
Development Corp., Series A (Baytown
Terrace Project) FNMA.................. 6.100 08/15/21 500,575
330 Bexar County, Texas, Housing Finance
Corp., Rev., Series B, GNMA............ 9.250 04/01/16 344,127
115 East Texas Housing Finance Corp.,
Single Family Mtg. Rev., GNMA.......... 7.200 01/01/26 117,076
250 El Paso, Texas, Housing Authority,
Multi-Family Mtg. Rev.,
Series A............................... 6.250 12/01/09 249,042
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 176
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 135 El Paso,Texas, Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A, GNMA................... 8.700% 12/01/18 $ 142,370
140 Galveston, Texas Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A......................... 8.500 09/01/11 160,103
30 Harris County, Texas, Housing Financing
Corp., Single Family Mtg. Rev., Series
1983-A................................. 10.125 07/15/03 30,054
100 Harris County, Texas, Housing Financing
Corp., Single Family Mtg. Rev., Series
1983-A................................. 10.375 07/15/14 100,140
50 Houston, Texas, Housing Finance Corp.,
Single Family Mtg. Rev................. 10.000 09/15/14 50,167
395 Houston, Texas, Housing Finance Corp.,
Single Family Mtg. Rev................. 10.375 12/15/13 400,826
170 Texas Housing Agency, Single Family
Mtg. Rev., Refunding,
Series A............................... 7.150 09/01/12 176,321
190 Travis County, Texas, Housing Finance
Corp., Single Family Mtg. Rev., GNMA... 8.200 04/01/22 195,373
-----------
2,966,549
-----------
MISCELLANEOUS 7.3%
60 Fort Bend County, Texas, Levee
Improvement, District No. 11, G.O...... 8.700 03/01/10 68,009
250 Garland, Texas, Economic Development
Authority, IDR (Yellow Freight System,
Inc. Project).......................... 8.000 12/01/16 260,120
250 Lockhart, Texas, Correctional
Facilities Rev., Financing Corp., MBIA. 6.625 04/01/12 260,378
283 Texas General Services Community
Partner Interests (Office Building and
Land Acquisition Project).............. 7.000 08/01/09 292,087
250 Texas State, G.O., Refunding, Veterans
Land................................... 6.500 12/01/21 261,733
250 Texas State, G.O., National Research
Lab Commission......................... 7.125 04/01/20 279,990
-----------
1,422,317
-----------
MUNICIPAL UTILITY DISTRICT (MUD) 15.0%
250 Brazoria County, Texas, MUD No. 2,
Refunding.............................. 7.000 09/01/08 255,922
60 Fort Bend County, Texas, MUD No. 25,
Refunding.............................. 8.000 10/01/15 63,977
250 Harris County, Texas, MUD No. 120,
Refunding.............................. 8.000 08/01/14 276,493
500 Harris County, Texas, MUD No. 322...... 6.250 05/01/18 475,070
500 Mills Road, Texas, MUD, Refunding...... 6.500 09/01/14 496,205
125 Mission Bend, Texas, MUD No. 2......... 10.000 09/01/00 144,641
250 Montgomery County, Texas, MUD.......... 6.000 09/01/19 231,218
250 Montgomery County, Texas, MUD.......... 6.000 09/01/16 230,970
250 Montgomery County, Texas, MUD, MBIA.... 6.250 03/01/10 258,243
50 Montgomery County, Texas, MUD No. 4.... 8.900 09/01/02 56,177
100 West Harris County, Texas, MUD No. 1,
Refunding.............................. 7.000 04/01/05 104,677
300 Woodlands, Texas, Metro Center, MUD,
Refunding, Series B.................... 7.100 04/01/07 339,060
-----------
2,932,653
-----------
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 177
PORTFOLIO OF INVESTMENTS (CONTINUED)
September 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NURSING HOMES 1.4%
$ 250 San Antonio, Texas, Health Facilities
Development Corp., Rev. (Encore Nursing
Center Partner)........................ 8.250% 12/01/19 $ 273,265
-----------
TRANSPORTATION 7.7%
1,000 Austin, Texas, Airport System Rev.,
Series A, MBIA......................... 6.125 11/15/25 991,750
250 Harris County, Texas, Toll Road Rev.... 6.750 08/01/14 265,897
250 Texas State Turnpike Authority, Dallas
North Toll Road, Tollway Rev........... 6.000 01/01/20 244,660
-----------
1,502,307
-----------
UTILITIES 26.4%
220 Austin, Texas, Utility System Rev.,
Series B............................... 7.800 11/15/12 242,191
1,000 Bexar, Texas, Metro Water District,
Waterworks System Rev., MBIA........... 5.875 05/01/22 971,140
435 City of Brownsville, Texas, Utilities
System Priority Rev., Series 1990,
AMBAC.................................. 6.500 09/01/17 478,983
250 Coastal Water Authority, Texas, Water
Rev., AMBAC............................ 6.250 12/15/17 253,560
250 Colorado River, Texas, Municipal Water
District (Water Transmission Facilities
Project A), AMBAC...................... 6.625 01/01/21 272,707
250 Guadalupe Blanco River Authority,
Texas, IDR............................. 6.350 07/01/22 258,435
100 Harris County, Texas, Water Control &
Improvement District No. 75 7.000 03/01/14 104,286
500 Houston, Texas, Water and Sewer System,
Refunding Rev., Series B............... 6.375 12/01/14 511,790
100 Matagorda County, Texas, Navigation
District 1, Control Rev, (Central Power
& Light Co. Project)................... 7.875 12/01/16 105,624
385 Port of Corpus Christi, Texas, IDR
(Valero Refining & Marketing Co.),
Series A............................... 10.250 06/01/17 426,234
100 Port of Corpus Christi, Texas, IDR
(Valero Refining & Marketing Co.),
Series B............................... 10.625 06/01/08 111,295
220 San Antonio, Texas, Electric and Gas
Rev., Series A......................... 6.500 02/01/12 228,813
250 Tarrant County, Texas, Water Control &
Improvement Rev........................ 6.000 03/01/10 266,000
435 Texas Municipal Power Agency, Rev...... 5.500 09/01/13 413,789
500 Willow Fork, Texas, Drainage District.. 7.000 03/01/11 521,430
-----------
5,166,277
-----------
TOTAL INVESTMENTS (Cost $18,470,839) 98.0% .................... 19,136,172
OTHER ASSETS AND LIABILITIES, NET 2.0%......................... 394,903
-----------
NET ASSETS 100%................................................ $19,531,075
</TABLE> -----------
Insurers:
G.O. general obligation bond AMBAC AMBAC Indemnity Corp.
IDR industrial development FGIC Financial Guaranty Insurance Corp.
revenue bond FNMA Federal National Mtg. Association
Rev. revenue bond GNMA Government National Mtg. Association
MBIA Municipal Bond Investor's Assurance
Corp.
See Notes to Financial Statements
B-39
<PAGE> 178
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $18,470,839).................. $19,136,172
Interest receivable.............................................. 356,808
Receivable for Fund shares sold.................................. 216,682
Receivable for investments sold.................................. 10,030
Other assets..................................................... 4,278
-----------
Total Assets.................................................... 19,723,970
-----------
LIABILITIES
Dividends payable................................................ 47,345
Bank overdraft................................................... 32,376
Due to Distributor............................................... 15,607
Due to Adviser................................................... 9,690
Deferred Trustees' compensation.................................. 5,359
Due to shareholder service agent................................. 3,377
Due to Trustees.................................................. 2,310
Accrued expenses and other payables.............................. 76,831
-----------
Total Liabilities............................................... 192,895
-----------
NET ASSETS, equivalent to $10.03 per share for Class A and Class
B, and $10.04 per share for Class C shares...................... $19,531,075
-----------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 1,110,686 Class A, 729,051
Class B and 107,241 Class C shares outstanding.................. $ 19,470
Capital surplus.................................................. 18,827,031
Undistributed net realized gain on securities.................... 24,601
Net unrealized appreciation of securities........................ 665,333
Accumulated net investment loss.................................. (5,360)
-----------
NET ASSETS....................................................... $19,531,075
-----------
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 179
STATEMENT OF OPERATIONS
Year Ended September 30, 1995
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................................................... $1,414,127
----------
EXPENSES
Management fees.................................................... 123,404
Shareholder service agent's fees and expenses...................... 18,769
Accounting services................................................ 67,413
Service fees--Class A.............................................. 26,331
Distribution and service fees--Class B............................. 75,938
Distribution and service fees--Class C............................. 11,528
Trustees' fees and expenses........................................ 9,920
Audit fees......................................................... 26,600
Custodian fees..................................................... 3,109
Legal fees......................................................... 9,038
Reports to shareholders............................................ 24,199
Registration and filing fees....................................... 9,230
Organization expenses.............................................. 3,000
Miscellaneous...................................................... 1,344
Expense reimbursement (see Note 2) ................................ (61,815)
----------
Total expenses.................................................... 348,008
----------
NET INVESTMENT INCOME.............................................. 1,066,119
----------
REALIZED AND UNREALIZED GAIN ON SECURITIES
Net realized gain on securities.................................... 65,437
Net unrealized appreciation of securities during the period........ 739,651
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... 805,088
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................... $1,871,207
----------
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 180
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended September 30
------------------------
1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period...................... $22,616,594 $25,210,015
----------- -----------
OPERATIONS
Net investment income............................... 1,066,119 1,279,721
Net realized gain (loss) securities................. 65,437 (39,911)
Net unrealized appreciation (depreciation) of
securities during the period....................... 739,651 (1,799,595)
----------- -----------
Increase (decrease) in net assets resulting from
operations......................................... 1,871,207 (559,785)
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM (see Note 1D)
Net investment income(/1/)
Class A............................................. (653,415) (849,857)
Class B............................................. (363,880) (383,566)
Class C............................................. (55,017) (40,808)
----------- -----------
(1,072,312) (1,274,231)
----------- -----------
Excess of book-basis net realized gain on securities
Class A............................................. -- (21,198)
Class B............................................. -- (9,656)
Class C............................................. -- (729)
----------- -----------
-- (31,583)
----------- -----------
Total distributions................................. (1,072,312) (1,305,814)
----------- -----------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A............................................. 517,409 1,892,676
Class B............................................. 362,817 2,691,555
Class C............................................. 299,878 1,309,798
----------- -----------
1,180,104 5,894,029
----------- -----------
Proceeds from shares issued for distributions
reinvested
Class A............................................. 299,151 428,301
Class B............................................. 179,325 197,947
Class C............................................. 9,580 10,051
----------- -----------
488,056 636,299
----------- -----------
Cost of shares redeemed
Class A............................................. (2,969,102) (6,308,560)
Class B............................................. (2,085,815) (872,378)
Class C............................................. (497,657) (77,212)
----------- -----------
(5,552,574) (7,258,150)
----------- -----------
Decrease in net assets from capital transactions.... (3,884,414) (727,822)
----------- -----------
DECREASE IN NET ASSETS............................... (3,085,519) (2,593,421)
----------- -----------
NET ASSETS, end of period (including accumulated net
investment loss of $(5,360) and undistributed net
investment income of $5,628, respectively).......... $19,531,075 $22,616,594
----------- -----------
</TABLE>
(1) Includes $2,502, $3,224, and $467 in excess of book-basis net investment
income as of September 30, 1995 for Class A, B, and C, respectively.
See Notes to Financial Statements
B-42
<PAGE> 181
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------
March 2, 1992(/1/)
Year Ended September 30 through
-------------------------- September 30,
1995 1994 1993(/2/) 1992(/2/)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................ $9.64 $10.36 $9.74 $9.45
------ ------ ------ -----
INCOME FROM OPERATIONS
Investment income............. .67 .64 .63 .42
Expenses...................... (.13) (.10) (.06) (.06)
------ ------ ------ -----
Net investment income.......... .54 .54 .57 .36
Net realized and unrealized
gains or losses on securities. .39 (.7025) .65 .23
------ ------ ------ -----
Total from investment opera-
tions......................... .93 (.1625) 1.22 .59
------ ------ ------ -----
LESS DISTRIBUTIONS FROM
Net investment income......... (.54) (.545) (.5875) (.30)
Excess of book-basis net real-
ized gains on securities..... -- (.0125) (.0125) --
------ ------ ------ -----
Total distributions............ (.54) (.5575) (.60) (.30)
------ ------ ------ -----
Net asset value, end of period. $10.03 $9.64 $10.36 $9.74
------ ------ ------ -----
TOTAL RETURN(/4/).............. 10.05% (1.62%) 12.94% 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (mil-
lions)........................ $11.1 $12.8 $18.0 $14.1
Average net assets (millions).. $11.8 $15.7 $16.8 $11.7
Ratios to average net assets
(annualized)(/3/)
Expenses...................... 1.36% 1.03% 0.61% 0.93%
Expenses, without expense re-
imbursement.................. 1.66% 1.70% 1.86% 1.41%
Net investment income......... 5.51% 5.41% 5.74% 5.94%
Net investment income, without
expense reimbursement........ 5.21% 4.74% 4.49% 5.45%
Portfolio turnover rate........ 15% 10% 5% 4%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements
B-43
<PAGE> 182
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------
July 27,
1992(/1/)
Year Ended September 30 through
--------------------------- September 30,
1995 1994 1993(/2/) 1992(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of pe-
riod............................. $9.64 $10.35 $9.74 $9.91
------ ------- ------- ------
INCOME FROM OPERATIONS
Investment income................ .67 .65 .63 .09
Expenses......................... (.21) (.18) (.13) (.025)
------ ------- ------- ------
Net investment income............. .46 .47 .50 .065
Net realized and unrealized gains
or losses on securities.......... .396 (.7065) .633 (.103)
------ ------- ------- ------
Total from investment operations.. .856 (.2365) 1.133 (.038)
------ ------- ------- ------
LESS DISTRIBUTIONS FROM
Net investment income............ (.46) (.461) (.5105) (.132)
Excess of book-basis net invest-
ment income..................... (.006) -- -- --
Excess of book-basis net realized
gains on securities............. -- (.0125) (.0125) --
------ ------- ------- ------
Total distributions............... (.466) (.4735) (.523) (.132)
------ ------- ------- ------
Net asset value, end of period.... $10.03 $9.64 $10.35 $9.74
------ ------- ------- ------
TOTAL RETURN(/4/)................. 9.11% (2.35%) 11.97% (.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (mil-
lions)........................... $7.3 $8.6 $7.1 $0.9
Average net assets (millions)..... $7.6 $8.4 $4.6 $0.5
Ratios to average net assets
(annualized)(/3/)
Expenses......................... 2.14% 1.80% 1.30% 1.41%
Expenses, without expense reim-
bursement....................... 2.44% 2.47% 2.55% 2.15%
Net investment income............ 4.74% 4.66% 4.92% 3.83%
Net investment income, without
expense reimbursement........... 4.44% 3.99% 3.67% 3.07%
Portfolio turnover rate........... 15% 10% 5% 4%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements
B-44
<PAGE> 183
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
---------------------------------
August 30,
Year Ended 1993(/1/)
September 30 through
----------------- September 30,
1995 1994(/2/) 1993(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........ $9.65 $10.36 $10.28
------ ------ ------
INCOME FROM OPERATIONS
Investment income.......................... .67 .64 .05
Expenses................................... (.21) (.18) (.01)
------ ------ ------
Net investment income....................... .46 .46 .04
Net realized and unrealized gains or losses
on securities.............................. .396 (.6965) .121
------ ------ ------
Total from investment operations............ .856 (.2365) .161
------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income...................... (.46) (.461) (.081)
Excess of book-basis net investment income. (.006) -- --
Excess of book-basis net realized gains on
securities................................ -- (.0125) --
------ ------ ------
Total distributions......................... (.466) (.4735) (.081)
------ ------ ------
Net asset value, end of period.............. $10.04 $9.65 $10.36
------ ------ ------
TOTAL RETURN(/4/)........................... 9.11% (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........ $1.1 $1.2 $0.1
Average net assets (millions)............... $1.2 $0.9 $.02
Ratios to average net assets
(annualized)(/3/)
Expenses................................... 2.14% 1.79% 0.66%
Expenses, without expense reimbursement.... 2.44% 2.46% 1.89%
Net investment income...................... 4.73% 4.59% 4.17%
Net investment income, without expense re-
imbursement............................... 4.43% 3.92% 2.92%
Portfolio turnover rate..................... 15% 10% 5%
</TABLE>
(1) Commencement of operations
(2) Based on average month-end shares outstanding.
(3) See Note 2.
(4) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements
B-45
<PAGE> 184
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Texas Tax Free Income Fund (the "Fund", formerly
American Capital Texas Municipal Securities, Inc.) is registered under the In-
vestment Company Act of 1940, as amended, as a non-diversified, open-end man-
agement 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.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal at maturity and interest. Such
insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated debt securities which may be more sus-
ceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties may exist as to an issuer's ability to meet princi-
pal and interest payments. At the end of the period, debt securities rated be-
low investment grade and comparable unrated securities represented
approximately 22% of the investment portfolio.
B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no further
distributions of capital gains will be made until tax basis capital loss
carryforwards, if any, expire or are offset by net realized capital gains.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Interest income is
accrued daily.
B-46
<PAGE> 185
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS-The Fund declares dividends from net investment
income each business day. Dividends and distributions to shareholders are re-
corded on the record dates. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
and distributions may exceed financial statement earnings.
The Fund intends to continue to invest principally in tax-exempt obligations
sufficient in amount to qualify the Fund to pay "exempt-interest dividends" as
defined in the Internal Revenue Code. However, a portion of such dividends may
represent tax preference items subject to alternative minimum tax.
E. DEBT DISCOUNT OR PREMIUM-The Fund accounts for debt 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
a security. Market discounts are recognized at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.
F. WHEN-ISSUED SECURITIES-Delivery and payment for securities purchased on a
when- issued basis may take place up to 45 days after the date of the transac-
tion. The securities purchased are subject to market fluctuations 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.
G. ORGANIZATION COSTS-Organization expenses of approximately $15,000 were de-
ferred and are being amortized over a five year period ending April 1997.
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
average daily net assets of the Fund at an annual rate of .60% of the first
$300 million, .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 reim-
burse the Fund a portion of the Fund's expenses. This reimbursement may be
discontinued at any time without prior notice. For the period, such reimburse-
ment was $61,815.
B-47
<PAGE> 186
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised by the Adviser. For the period, these
charges included $6,427 as the Fund's share of the employee costs attributable
to the Fund's accounting officers. A portion of the accounting services ex-
pense was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period the fees for such services were $12,513.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"),
both affiliates of the Adviser, received $2,589 and $157, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. Class B and Class C shares pay an additional 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 Dis-
tributor for Class B and Class C shares may exceed the amounts reimbursed to
the Distributor by the Fund. At the end of the period, the unreimbursed ex-
penses incurred by the Distributor under the Class B and Class C plans aggre-
gated approximately $347,000 and $16,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent de-
ferred sales charges from shares redemptions or, subject to the annual renewal
of the plans, future Fund reimbursements of distribution fees.
Legal fees of $9,011 were for services rendered by O'Melveny & Myers, coun-
sel 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 trustees of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $3,050,373 and $6,987,281, re-
spectively.
For federal income tax purposes, the identified cost of investments owned at
the end of the period, was $18,470,877. Net unrealized appreciation of invest-
ments aggregated $665,295, gross unrealized appreciation of investments aggre-
gated $746,294, and gross unrealized depreciation of investments aggregated
$80,999.
B-48
<PAGE> 187
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
NOTE 4--TRUSTEE COMPENSATION
Fund trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $629 plus a fee of $18 per day for Board meetings
attended. During the period, such fees aggregated $8,342.
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 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 trustee covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B and Class C shares). All classes of shares have the same
rights, except that Class B 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 and Class C shares automatically convert
to Class A shares six years and ten years after purchase, respectively, sub-
ject to certain conditions.
B-49
<PAGE> 188
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
Year Ended September 30
-----------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A.............................................. 52,801 187,834
Class B.............................................. 37,593 265,842
Class C.............................................. 30,198 128,146
----------- -----------
120,592 581,822
----------- -----------
Shares issued for distributions reinvested
Class A.............................................. 30,626 42,661
Class B.............................................. 18,363 19,840
Class C.............................................. 981 1,010
----------- -----------
49,970 63,511
----------- -----------
Shares redeemed
Class A.............................................. (304,310) (637,534)
Class B.............................................. (215,721) (87,755)
Class C.............................................. (50,161) (7,831)
----------- -----------
(570,192) (733,120)
----------- -----------
Decrease in shares outstanding........................ (399,630) (87,787)
----------- -----------
</TABLE>
NOTE 6--FUND REORGANIZATION
On July 21, 1995, the shareholders approved the reorganization of the Fund to
a Delaware Business Trust and the election of fourteen trustees. On August 26,
1995, the reorganization became effective.
B-50
<PAGE> 189
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, includ-
ing the portfolio of investments, 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 Van Kampen American Capital Texas
Tax Free Income Fund at September 30, 1995, and the results of its operations,
the changes in its net assets and the financial highlights for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter re-
ferred to as "financial statements") are the responsibility of the Fund's man-
agement; 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 re-
quire 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 dis-
closures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall fi-
nancial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmation from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
/s/ PRICE WATERHOUSE LLP
Houston, Texas
November 7, 1995
B-51
<PAGE> 190
APPENDIX D
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
PORTFOLIO OF INVESTMENTS
March 31, 1996 (Unaudited)
<PAGE> 191
PORTFOLIO OF INVESTMENTS
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 104.6%
EDUCATION 5.8%
$ 500 Houston, Texas, Higher Education
Finance Corp., Rev. (University of St.
Thomas Project)........................ 7.250% 12/01/07 $ 526,045
500 North Texas Higher Education Authority,
Inc., Texas Student Loan Rev.,
Refunding, Series D.................... 6.300 04/01/09 508,230
-----------
1,034,275
-----------
GENERAL OBLIGATION 8.6%
500 Harris County, Texas, MUD No. 322...... 6.250 05/01/18 488,850
250 Montgomery County, Texas, MUD.......... 6.000 09/01/16 237,585
250 Texas State Refunding Veterans Land.... 6.500 12/01/21 263,852
500 Willow Fork, Texas, Drainage District.. 7.000 03/01/11 522,560
-----------
1,512,847
-----------
HOSPITAL 24.5%
165 Bell County, Texas, Health Facilities
Development Corp. (King's Daughters
Hospital).............................. 9.250 07/01/08 180,987
1,000 Brazoria County, Texas, Health
Facilities Development Corp. Hospital
Rev., Refunding (Brazosport Memorial
Hospital) FSA.......................... 5.500 07/01/13 960,090
375 Harris County, Texas, Health Facilities
Development Corp., Health Care System
Rev. (Sisters of Charity).............. 7.100 07/01/21 403,736
250 Harris County, Texas, Health Facilities
Development Corp. (Memorial Hospital
System Project)........................ 7.125 06/01/15 268,380
150 Montgomery County, Texas, Health
Facilities Development Corp., Hospital
Mortgage Rev. (Woodlands Medical Center
Project)............................... 8.850 08/15/14 162,555
500 Richardson, Texas, Hospital Authority,
Refunding & Improvement Rev.
(Richardson Medical Center)............ 6.750 12/01/23 517,515
300 Rusk County, Texas, Health Facilities
Corp., Hospital Rev. (Henderson
Memorial Hospital Project)............. 7.750 04/01/13 315,864
500 Tarrant County, Texas, Health Facilites
Development Corp., Hospital Rev.,
Refunding & Improvement (Fort Worth
Osteopathic Hospital).................. 7.000 05/15/28 522,555
250 Texas Health Facilities Development
Corp., Hospital Rev. (Fort Worth
Children's Center) FGIC................ 6.250 12/01/12 257,215
250 Tomball, Texas, Hospital Authority
Rev., Refunding........................ 6.125 07/01/23 235,185
500 Tyler, Texas, Health Facilities
Development Corp., Refunding Rev. (East
Texas Medical Center-Regional Center)
Series B............................... 6.750 11/01/25 504,520
-----------
4,328,602
-----------
HOUSING 16.2%
500 Austin, Texas, Housing Finance Corp.,
Multi-Family Housing Rev............... 6.500 10/01/10 501,820
500 Baytown, Texas, Property Management &
Development Corp. (Baytown Terrace
Project) Series A, FNMA................ 6.100 08/15/21 508,260
330 Bexar County, Texas, Housing Finance
Corp., Rev., Series B, GNMA............ 9.250 04/01/16 341,959
115 East Texas Housing Finance Corp.,
Single Family Mtg. Rev., GNMA.......... 7.200 01/01/26 116,374
</TABLE>
See Notes to Financial Statements
D-1
<PAGE> 192
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 250 El Paso, Texas, Housing Authority,
Multi-Family Mtg. Rev.,
Series A............................... 6.250% 12/01/09 $ 251,325
130 El Paso, Texas, Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A, GNMA................... 8.700 12/01/18 136,154
125 Galveston, Texas, Property Finance
Authority, Inc., Single Family Mtg.
Rev., Series A......................... 8.500 09/01/11 142,434
30 Harris County, Texas, Housing Financing
Corp., Single Family Mtg. Rev., Series
1983-A................................. 10.125 07/15/03 29,999
100 Harris County, Texas, Housing Financing
Corp., Single Family Mtg. Rev., Series
1983-A................................. 10.375 07/15/14 99,981
395 Houston, Texas, Housing Financing
Corp., Single Family Mtg. Rev.......... 10.375 12/15/13 396,872
155 Texas Housing Agency, Single Family
Mtg. Rev., Refunding, Series A......... 7.150 09/01/12 159,745
180 Travis County, Texas, Housing Finance
Corp., Single Family Mtg. Rev., GNMA... 8.200 04/01/22 184,090
-----------
2,869,013
-----------
MISCELLANEOUS 6.1%
250 Brazoria County, Texas, MUD No. 2,
Refunding.............................. 7.000 09/01/08 267,500
250 Garland, Texas, Economic Development
Authority, IDR (Yellow Freight System,
Inc. Project).......................... 8.000 12/01/16 256,193
250 Lockhart, Texas, Correctional
Facilities Rev., Financing Corp., MBIA. 6.625 04/01/12 262,107
283 Texas General Services Community
Partner Interests (Office Building and
Land Acquisition Project).............. 7.000 08/01/09 291,980
-----------
1,077,780
-----------
MUNICIPAL UTILITY DISTRICT (MUD) 12.0%
250 Harris County, Texas, MUD No. 120,
Refunding.............................. 8.000 08/01/14 276,725
650 Harris County, Texas, MUD No. 322,
Refunding (Waterworks & Sewer Systems)
Series A............................... 6.000 05/01/15 607,971
500 Mills Road, Texas, MUD, Refunding...... 6.500 09/01/14 502,175
125 Mission Bend, Texas, MUD No. 2......... 10.000 09/01/00 142,154
250 Montgomery County, Texas, MUD.......... 6.000 09/01/19 238,223
250 Montgomery County, Texas, MUD, MBIA.... 6.250 03/01/10 257,700
100 West Harris County, Texas, MUD No. 1,
Refunding.............................. 7.000 04/01/05 104,312
-----------
2,129,260
-----------
</TABLE>
See Notes to Financial Statements
D-2
<PAGE> 193
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NURSING HOMES 1.6%
$ 250 San Antonio, Texas, Health Facilities
Development Corp., Rev. (Encore Nursing
Center Partner)........................ 8.250% 12/01/19 $ 275,797
-----------
TRANSPORTATION 8.7%
1,000 Austin, Texas, Airport System Rev.,
Series A, MBIA......................... 6.125 11/15/25 1,015,710
250 Harris County, Texas, Toll Road Rev.... 6.750 08/01/14 269,818
250 Texas State Turnpike Authority, Dallas
North Toll Road, Tollway Rev........... 6.000 01/01/20 250,303
-----------
1,535,831
-----------
UTILITIES 21.1%
220 Austin, Texas, Utility System Rev.,
Series B............................... 7.800 11/15/12 240,781
1,000 Bexar, Texas, Metro Water District,
Waterworks System Rev., MBIA........... 5.875 05/01/22 1,003,980
250 Coastal Water Authority, Texas, Water
Rev., AMBAC............................ 6.250 12/15/17 256,107
60 Fort Bend County, Texas Refunding #25.. 8.000 10/01/15 68,478
250 Guadalupe Blanco River Authority,
Texas, IDR............................. 6.350 07/01/22 262,857
100 Harris County, Texas, Water Control &
Improvement District No. 75 7.000 03/01/14 104,916
500 Houston, Texas, Water and Sewer System,
Refunding Rev.,
Series B............................... 6.375 12/01/14 526,465
100 Matagorda County, Texas, Navigation
District 1, Control Rev, (Central Power
& Light Project)....................... 7.875 12/01/16 104,261
385 Port of Corpus Christi, Texas, IDR
(Valero Refining & Marketing Co. )..... 10.250 06/01/17 418,630
100 Port of Corpus Christi, Texas, IDR
(Valero Refining & Marketing Co.),
Series B............................... 10.625 06/01/08 108,752
220 San Antonio, Texas, Electric and Gas
Rev., Series A......................... 6.500 02/01/12 229,284
435 Texas Municipal Power Agency, Rev...... 5.500 09/01/13 410,771
-----------
3,735,282
-----------
TOTAL INVESTMENTS (Cost $17,908,571) 104.6% ................... 18,498,687
OTHER ASSETS AND LIABILITIES, NET (4.6%)....................... (819,875)
-----------
NET ASSETS 100%................................................ $17,678,812
</TABLE> -----------
Insurers:
IDR industrial development AMBAC AMBAC Indemnity Corp.
revenue bond FGIC Financial Guaranty Insurance Corp.
Rev. revenue bond FSA Financial Security Assurance, Inc.
FNMA Federal National Mtg. Association
GNMA Government National Mtg. Association
MBIA Municipal Bond Investor's Assurance Corp.
See Notes to Financial Statements
D-3
<PAGE> 194
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately that he or
she is entitled to the indemnification and only if the following conditions are
met: (1) the trustee or officer provides security for the undertaking; (2) the
Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S> <C>
(1) -- (a) Agreement and Declaration of Trust(39)
-- (b) Certificate of Designation for
Van Kampen American Capital Municipal Income Fund(39)
(2) -- Bylaws(39)
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen American Capital
Municipal Income Fund and the Van Kampen American Capital Texas Tax Free Income Fund*
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares(39)
-- (b) Class B Shares(39)
-- (c) Class C Shares(39)
</TABLE>
C-1
<PAGE> 195
<TABLE>
<C> <C> <S> <C>
(6) -- Investment Advisory Agreement(39)
(7) -- (a) Distribution and Service Agreement(39)
-- (b) Form of Dealer Agreement(37)
-- (c) Form of Broker Agreement(37)
-- (d) Form of Bank Agreement(37)
(9) -- (a) Form of Custodian Agreement(10) and (6)
-- (b) Transfer Agency and Service Agreement(39)
(10) -- (a) Distribution Plan Pursuant to Rule 12b-1(39)
-- (b) Form of Shareholder Assistance Agreement(37)
-- (c) Form of Administrative Services Agreement(37)
-- (d) Service Plan(39)
(11) -- Form of Opinion of Skadden, Arps, Slate, Meagher & Flom relating to
Van Kampen American Capital Municipal Income Fund+
(12) -- Form of Tax Opinion of Skadder, Arps, Slate, Meagher & Flom relating to the
Reorganization+
(13) -- (a) Amended and Restated Fund Accounting Agreement(39)
-- (b) Amended and Restated Legal Services Agreement(39)
(14) -- (a) Consent of Price Waterhouse LLP relating to
Van Kampen American Capital Texas Tax Free Income Fund+
-- (b) Consent of KPMG Peat Marwick LLP relating to
Van Kampen American Capital Municipal Income Fund+
(16) -- Powers of Attorney(38)
(17) -- (a) Copy of 24f-2 Election of Registrant*
-- (b) Form of proxy card for Van Kampen American Capital Texas Tax Free Income Fund*
-- (c) Prospectus of Van Kampen American Capital Texas Tax Free Income Fund dated
January 30, 1996*
</TABLE>
- ---------------
* Filed herewith.
+ To be filed by amendment.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 22, 1988.
(10) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(37) Incorporated herein by reference to Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on August 1, 1995.
(38) Incorporated herein by reference to Post-Effective Amendment No. 38 to
Registrant's Registration Statement on Form N1-A, File Number 2-99715,
filed on August 18, 1995.
(39) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N1-A, File Number 2-99715,
filed on April 29, 1996.
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.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-2
<PAGE> 196
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 17TH DAY OF JUNE, 1996.
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
By /s/ RONALD A. NYBERG
------------------------------------
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON JUNE 17, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
Principal Executive Officer:
/s/ DON G. POWELL* President and Trustee
- ---------------------------------------------
Don G. Powell
Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- ---------------------------------------------
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- ---------------------------------------------
J. Miles Branagan
/s/ LINDA HUTTON HEAGY* Trustee
- ---------------------------------------------
Linda Hutton Heagy
/s/ ROGER HILSMAN* Trustee
- ---------------------------------------------
Roger Hilsman
/s/ R. CRAIG KENNEDY* Trustee
- ---------------------------------------------
R. Craig Kennedy
/s/ DENNIS J. MCDONNELL* Trustee
- ---------------------------------------------
Dennis J. McDonnell
/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/ FERNANDO SISTO* Trustee
- ---------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- ---------------------------------------------
Wayne W. Whalen
/s/ WILLIAM S. WOODSIDE* Trustee
- ---------------------------------------------
William S. Woodside
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.
/s/ RONALD A. NYBERG* June 17, 1996
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-3
<PAGE> 197
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
<TABLE>
<CAPTION>
EXHIBIT PAGE
- ------- ----
<C> <S> <C>
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen American Capital
Municipal Income Fund and the Van Kampen American Capital Municipal Bond Fund
(17) -- (a) Copy of 24f-2 Election of Registrant
-- (b) Form of proxy card for Van Kampen American Capital Texas Tax Free Income
Fund
-- (c) Prospectus of Van Kampen American Capital Texas Tax Free Income Fund dated
January 30, 1996.
</TABLE>
<PAGE> 1
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1996, by and between Van Kampen American Capital Tax Free Trust, a
Delaware business trust formed under the laws of the State of Delaware (the
"Trust") on behalf of its series, Van Kampen American Capital Municipal Income
Fund (the "Municipal Fund") and Van Kampen American Capital Texas Tax Free
Income Fund a business trust formed under the laws of the State of Delaware (the
"Texas Fund").
WITNESSETH:
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 the combined entity's 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 Texas Fund and the Municipal
Fund;
WHEREAS, the Texas Fund was organized as a corporation under the laws of
Maryland on September 6, 1991, and subsequently reorganized as a Delaware
business trust, pursuant to an Agreement and Declaration of Trust subsequently
amended and restated as of June 20, 1995, pursuant to which it is authorized to
issue an unlimited number of shares of beneficial interest which have a par
value equal to $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("Texas Adviser") provides investment
advisory and administrative services to the Texas Fund;
WHEREAS, the 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 May 10, 1995,
pursuant to which it is authorized to issue an unlimited number of shares of
A-1
<PAGE> 2
beneficial interest for each series authorized by the trustees, one of which
series is the Municipal 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.) ("Municipal Adviser") provides
investment advisory and administrative services to the Municipal Fund;
WHEREAS, the Board of Trustees of each of the Trust and the Texas Fund have
determined that entering into this Agreement for the Municipal Fund to acquire
the assets and liabilities of the Texas 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 TRANSACTLON.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth
in Sections 7 and 8 hereof, the Texas Fund will convey, transfer and deliver to
the Municipal Fund at the closing, provided for in Section 2 hereof, all of the
existing assets of the Texas 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 Municipal 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 Trust agrees that on the
Closing Date the Trust will (i) deliver to the Texas Fund, full and fractional
Class A, Class B and Class C Shares of beneficial interest of the Municipal Fund
having net asset values per share in an amount equal to the aggregate dollar
value of the Assets net of any liabilities of the Texas Fund described in
Section 3E hereof (the "Liabilities") determined pursuant to Section 3A of this
Agreement (collectively, the "Municipal Fund Shares") and (ii) assume all of the
Texas Fund's Liabilities. [The calculation of full and fractional Class A, Class
B and Class C Shares of beneficial interest of the Municipal Fund to be
exchanged shall be carried out to no less than two (2) decimal places.] All
Municipal Fund Shares delivered to the Texas Fund in exchange for such Assets
shall be delivered at net asset value without sales load, commission or other
transactional fee being imposed.
A-2
<PAGE> 3
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 Texas 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 Trust shall deliver to the Texas Fund the Municipal
Fund Shares in the amount determined pursuant to Section 1B hereof and the Texas
Fund thereafter shall, in order to effect the distribution of such shares to the
Texas Fund stockholders, instruct the Trust to register the pro rata interest in
the Municipal Fund Shares (in full and fractional shares) of each of the holders
of record of shares of the Texas 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 Trust agrees promptly to comply with
said instruction. The 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 Texas Fund to be
transferred and assumed, respectively, by the Municipal 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 Municipal Fund (collectively, the
"Trust Prospectus"), copies of which have been delivered to the Texas 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 Municipal Fund (the "Custodian")
for the benefit of the Municipal 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 Texas Fund.
C. FAILURE TO DELIVER SECURITIES. If the Texas Fund is unable to make delivery
pursuant to Section 3B hereof to the Custodian of any of the Texas Fund's
securities for the reason that any of such securities purchased by the Trust
have not yet been delivered to it by the Texas Fund's broker or brokers, then,
in lieu of such delivery, the Texas 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 Trust or Custodian, including brokers'
confirmation slips.
A-3
<PAGE> 4
D. SHAREHOLDER ACCOUNTS. The Trust, in order to assist the Texas Fund in the
distribution of the Municipal Fund Shares to the Texas Fund shareholders after
delivery of the Municipal Fund Shares to the Texas Fund, will establish pursuant
to the request of the Texas Fund an open account with the Municipal Fund for
each shareholder of the Texas Fund and, upon request by the Texas Fund, shall
transfer to such account the exact number of full and fractional Class A, Class
B and Class C shares of the Municipal Fund then held by the Texas Fund specified
in the instruction provided pursuant to Section 2 hereof. The Municipal Fund is
not required to issue certificates representing Municipal Fund Shares unless
requested to do so by a shareholder. Upon liquidation or dissolution of the
Texas Fund, certificates representing shares of beneficial interest stock of the
Texas Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Texas 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 Texas Fund 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 Trust's Registration Statement on Form N-14
(the "Registration Statement") and the solicitation of the Texas Fund
shareholder proxies; (ii) the Texas Fund 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 Municipal Adviser.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no event
later than one year after the Closing Date, the Texas 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 Texas Fund.
Immediately after the Closing Date, the stock transfer books relating to the
Texas Fund shall be closed and no transfer of shares shall thereafter be made on
such books.
A-4
<PAGE> 5
4. TEXAS FUND'S REPRESENTATIONS AND WARRANTIES.
The Texas Fund, hereby represents and warrants to the Trust, which
representations and warranties are true and correct on the date hereof, and
agrees with the Trust that:
A. ORGANIZATION. The Texas 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 Texas 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 Texas Fund. The Texas Fund has all material federal, state
and local authorizations 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 Texas Fund.
B. REGISTRATION. The Texas Fund is registered under the Investment Company Act
of 1940, as amended (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. The Texas 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 beneficial interest of the Texas Fund have been duly authorized and
are validly issued, fully paid and nonassessable 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 Texas Fund audited as of and for the year ended
September 30, 1995, true and complete copies of which have been heretofore
furnished to the Trust, fairly represent the financial condition and the results
of operations of the Texas 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 Texas Fund shall furnish to the 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 Texas
Fund for the period ended March 31, 1996; 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 Texas 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
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operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the Texas Fund
as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be, no
contingent Liabilities of the Texas Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the Texas Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Texas Fund which would, if adversely determined, materially affect
the Texas Fund's financial condition. All Liabilities were incurred by the Texas
Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Texas 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 Texas
Fund's Prospectus and Statement of Additional Information, there are no material
agreements outstanding relating to the Texas Fund to which the Texas 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
Texas Fund, shall furnish the Municipal Fund with a statement of the earnings
and profits of the Texas Fund within the meaning of the Code as of the Closing
Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of the
Texas 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 material tax returns and reports of the Texas 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 Texas 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 Texas 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 Texas
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the Texas Fund, no other corporate acts or proceedings by the
Texas Fund are necessary to authorize this Agreement and the transactions
contemplated
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herein. This Agreement has been duly executed and delivered by the Texas Fund
and constitutes the legal, valid and binding obligation of Texas Fund
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Texas Fund does not and will not (i)
violate any provision of the Declaration of Trust or amendment or restatement
thereof of the Texas Fund, (ii) violate any statute, law, judgment, writ,
decree, order, regulation or rule of any court or governmental authority
applicable to the Texas 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 Texas Fund
is subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the Texas 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 Texas 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 Texas 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 Texas Fund, other than
changes in the ordinary course of its business, or any pending or threatened
litigation, which has had or may have a material adverse 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
Texas Fund granted by the Texas Fund to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Prospectus
for the Texas Fund;
(3) any entering into, amendment or termination of any contract or agreement
by Texas Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of business,
by the Texas Fund for borrowed money or any commitment to borrow money entered
into by the Texas Fund;
(5) any amendment of the Declaration of Trust of the Texas Fund; or
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(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 Texas Fund other than a lien for taxes
not yet due and payable.
M. TITLE. On the Closing Date, the Texas 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 deliver such Assets; upon delivery of such Assets, the
Municipal 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 Texas Fund's Proxy Statement, at the time of delivery
by the Texas Fund to its shareholders in connection with a special meeting of
shareholders to approve this transaction, and the Texas Fund's Prospectus and
Statement of Additional Information with respect to the Texas Fund on the forms
incorporated by reference into such Proxy Statement and as of their respective
dates (collectively, the "Texas Fund's Proxy Statement/Prospectus"), and at the
time the Registration Statement becomes effective, the Registration Statement
insofar as it relates to the Texas 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 Trust, Municipal Fund or their affiliates furnished to the Texas
Fund by the Trust.
O. BROKERS. There are no brokers or finders fees payable by the Texas Fund
Trust in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The Texas 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 Municipal Fund
and those to which the Assets are subject.
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R. TEXAS FUND LIABILITIES. Except as otherwise provided for herein, the Texas
Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the Texas Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
5. THE TRUST'S REPRESENTATIONS AND WARRANTIES.
The Trust, on behalf of the Municipal Fund, hereby represents and warrants to
the Texas Fund, which representations and warranties are true and correct on the
date hereof, and agrees with the Texas Fund that:
A. ORGANIZATION. The 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 Municipal Fund is a
separate series of the Trust duly designated in accordance with the applicable
provisions of the Declaration of Trust. The Trust and Municipal 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 Trust or Municipal Fund. The
Trust has all material federal, state and local authorizations necessary to
own on behalf of the Trust all of the properties and assets allocated to the
Municipal 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 Trust or Municipal Fund.
B. REGISTRATION. The Municipal Fund is registered under the 1940 Act as an
open-end, diversified management company and such registration has not been
revoked or rescinded. The 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 Municipal 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 Municipal Fund audited as of and for the year
ended December 31, 1995, true and complete copies of which have been
heretofore furnished to the Texas Fund fairly represent the financial
condition and the results of operations of the Municipal 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.
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D. FINANCIAL STATEMENTS. The Trust shall furnish to the Texas 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
Municipal Fund for the period ended [February 29, 1996], 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 Municipal 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 Municipal 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 Trust as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
Municipal Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Municipal Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Municipal
Fund which would, if adversely determined, materially affect the Municipal
Fund's financial condition.
F. MATERIAL AGREEMENTS. The Municipal 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 Trust Prospectus, there are no material agreements outstanding to which
the Municipal Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Municipal Fund required by law
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 Municipal 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 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 Trust's Board of Trustees, no other corporate
acts or proceedings by the Trust or Municipal Fund are necessary to authorize
this Agreement and the transactions contemplated herein. This Agreement has
been duly
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executed and delivered by the Trust and constitutes a valid and binding
obligation of the Trust enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar law affecting creditors'
rights generally, or by general principals of equity (regardless of whether
enforcement is sought in a proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Trust does not and will not (i) result in
a material violation of any provision of the Declaration of Trust of the Trust
or the Designation of Series of the Municipal 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 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 Trust pursuant to any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the Trust is subject. Except as set forth in Schedule 3 to
this Agreement, (i) no consent, approval, authorization, order or filing with
notice to any court or governmental authority or agency is required for the
consummation by the 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 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 Municipal
Fund which would materially affect its financial condition.
K. SHARES OF THE MUNICIPAL FUND: REGISTRATION. The Municipal 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 MUNICIPAL FUND: AUTHORIZATION. Subject to the matters set
forth in the Statement of Additional Information of the Municipal Fund, under
the heading "The Fund and the Trust", a copy of which has been furnished to
the Texas Fund, the shares of beneficial interest of the Municipal 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 Trust and conform in all material respects to the
description thereof contained in the Trust's Prospectus furnished to the Texas
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
Municipal Fund, other than changes in the ordinary course of its business,
which has had a
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material adverse effect on such business, results of operations, assets or
financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein as of the effective date of the Registration Statement, and
at all times subsequent thereto up to 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 Texas Fund furnished to the
Trust by the Texas Fund.
O. TAX QUALIFICATION. The Municipal 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 Municipal 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 Municipal
Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Texas Fund and Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Texas 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 Texas Fund and Trust shall file all
reports required to be filed by the Texas Fund and Trust with the SEC between
the date of this Agreement and 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 Texas
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Fund and the 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
Texas Fund's Proxy Statement/Prospectus, each party hereto will cooperate with
the other and furnish to the other the information relating to the Texas Fund,
Trust or Municipal 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 Texas Fund shall promptly
prepare and file with the SEC the Proxy Statement/Prospectus and the 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 Texas
Fund and its affiliated persons, Trust shall only include such information as
is approved by the Texas Fund for use in the Registration Statement. The Trust
shall not amend or supplement any such information regarding the Trust and
such affiliates without the prior written consent of the Texas Fund which
consent shall not be unreasonably withheld or delayed. The Trust shall
promptly notify and provide the Texas Fund with copies of all amendments or
supplements filed with respect to the Registration Statement. The 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 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 Trust's shares of beneficial interest in the transactions
contemplated by this Agreement, and the Texas Fund shall furnish all
information concerning the Texas Fund and the holders of the Texas Fund's
shares of beneficial interest as may be reasonably requested in connection
with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Texas Fund shall make available to the 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 Texas Fund). During the period prior to the Closing Date, the
Trust shall make available to the Texas 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
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(other than Documents which such party is not permitted to disclose under
applicable law or which are not relevant to the Municipal Fund).
E. SHAREHOLDERS MEETING. The Texas Fund shall call a meeting of the Texas
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 Texas Fund as of the record date for such
meeting of shareholders. The Texas Fund's Board of Trustees shall recommend to
the Texas Fund shareholders approval of this Agreement and the transactions
contemplated herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Texas Fund and Trust covenant and agree
to coordinate the respective portfolios of the Texas Fund and Municipal 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 Municipal Fund's portfolio,
the resulting portfolio will meet the Municipal Fund's investment objective,
policies and restrictions, as set forth in the Municipal Fund's Prospectus, a
copy of which has been delivered to the Texas Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Texas Fund covenants that it
shall cause to be distributed the Municipal Fund Shares in the proper pro rata
amount for the benefit of Texas Fund's shareholders and such that the Texas
Fund shall not continue to hold amounts of said shares so as to cause a
violation of Section 12(d)(1) of the 1940 Act. The Texas Fund covenants
further that, pursuant to Section 3G, it shall liquidate and dissolve as
promptly as practicable after the Closing Date. The Texas Fund covenants to
use all reasonable efforts to cooperate with the Trust and the 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 Texas Fund and the 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 the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
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J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Texas Fund and the 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 Trust, the Municipal Fund nor the Texas 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 Trust, the Municipal Fund and the Texas Fund will take
such action, or cause such action to be taken, as is reasonably necessary to
enable Skadden, Arps, Slate, Meagher & Flom, counsel to the Texas Fund, to
render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the
Texas Fund shall declare and pay to its stockholders a dividend or other
distribution 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 TEXAS FUND.
The obligations of the Texas Fund hereunder with respect to the consummation
of the Reorganization are subject to the satisfaction, or written waiver by the
Texas 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 beneficial interest the Texas 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 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 Municipal Fund, and the Texas
Fund shall have received a certificate of the President or Vice President of
the Trust satisfactory
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in form and substance to the Texas Fund so stating. The 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 effect on business operations of the Municipal Fund.
F. TAX OPINION. The Texas Fund shall have obtained an opinion from Skadden,
Arps, Slate, Meagher & Flom, counsel for the Texas Fund, dated as of the
Closing Date, addressed to the Texas 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 Code, substantially in
the form attached as Annex A.
G. OPINION OF COUNSEL. The Texas Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Trust, dated as of the
Closing Date, addressed to the Texas Fund substantially in the form and to the
effect that: (i) the 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 Trust has duly designated the Municipal Fund as a series of the Trust
pursuant to the terms of the Declaration of Trust of the Trust; (iii) the
Municipal Fund is registered as an open-end, diversified management company
under 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 Trust and this Agreement has been duly
executed and delivered by the Trust and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Trust; (v) neither the execution or delivery by the Trust of
this Agreement nor the consummation by
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the Trust or Municipal Fund of the transactions contemplated thereby
contravene the 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 it by the Trust as being applicable to the
Trust or the Municipal Fund; (vi) to the best of their knowledge based solely
on the certificate of an appropriate officer of the 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 Municipal Fund or
might have a material adverse effect on the value of any assets of the
Municipal Fund; (vii) the Municipal 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 nonassessable; (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 Trust and the Municipal 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
SEC 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 Trust and Municipal 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 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). 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 Texas Fund
of any material benefit under the Agreement; or (c) which can be readily
obtained without significant delay or expense to the Texas Fund, without loss
to the Texas Fund of any material benefit under the Agreement and without any
material adverse effect on the Texas Fund 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
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<PAGE> 18
filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States which, in counsel's 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 Trust in connection with the opinion. In addition,
although counsel need not specifically considered the possible applicability
to the Trust of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the Trust and the
Municipal Fund 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 Texas Fund shall have received a certificate of
an authorized officer of the 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 Texas Fund.
8. CONDITIONS TO OBLIGATIONS OF TRUST.
The obligations of the Trust hereunder with respect to the consummation of the
Reorganization are subject to the satisfaction, or written waiver by the 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 Texas 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 Texas Fund 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 Texas Fund since [July
26, 1996] and the Trust shall have received a certificate of the Chairman or
President of the Texas Fund satisfactory in form and substance to the Trust so
stating. The Texas 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.
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<PAGE> 19
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 Trust and the Municipal Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom, counsel for the Texas Fund,
dated as of the Closing Date, addressed to the Trust and Municipal 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
Code substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The Trust and Municipal Fund shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the Texas Fund,
dated as of the Closing Date, addressed to the Trust and Municipal Fund,
substantially in the form and to the effect that: (i) the Texas Fund is duly
formed and existing as a trust under the laws of the State of Delaware; (ii)
the Texas Fund is registered as an open-end, diversified management company
under the 1940 Act; (iii) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized by all
necessary trust action of the Texas Fund and this Agreement has been duly
executed and delivered by the Texas Fund and (assuming the Agreement is a
valid and binding obligation of the other parties thereto) is a valid and
binding obligation of the Texas Fund (iv) neither the execution or delivery by
the Texas Fund of this Agreement nor the consummation by the Texas Fund of the
transactions contemplated thereby contravene the Texas Fund's Declaration of
Trust or, to their knowledge, violate any provision of any statute, or any
published regulation or any judgment or order disclosed to them by the Texas
Fund as being applicable to the Texas Fund; (v) to their knowledge based
solely on the certificate of an appropriate officer of the Texas Fund attached
thereto, there is no pending, or threatened litigation involving the Texas
Fund except as disclosed therein (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 10b5 type opinions as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the Texas Fund and the Texas 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
SEC 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
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<PAGE> 20
Statement applicable to the Texas 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 their knowledge and subject to the qualifications set
forth below, the execution and delivery by the Texas Fund 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 Trust or
Municipal Fund of any material benefit under such agreements; or (c) which can
be readily obtained without significant delay or expense to the Trust or
Municipal Fund, without loss to the Trust or Municipal 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
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States 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 them by the Texas Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the Texas Fund of any other laws, orders or judgments,
nothing has come to their attention in connection with their representation of
the Texas Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order or
filing is required.
H. 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 Municipal Fund's
investment objectives, policies and restrictions as set forth in the Trust
Prospectus, a copy of which has been delivered to the Texas Fund.
I. SHAREHOLDER LIST. The Texas Fund shall have delivered to the Trust an
updated list of all shareholders of the Texas Fund, as reported by the Texas
Fund's transfer agent, as of one (1) business day prior to the Closing Date
with
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<PAGE> 21
each shareholder's respective holdings in the Texas Fund, taxpayer
identification numbers, Form W9 and last known address.
J. OFFICER CERTIFICATES. The Trust shall have received a certificate of an
authorized officer of the Texas 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 Trustees and shareholders shall be furnished to the
Trust.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Trustees, amend this Agreement at any time before or after
approval thereof by the shareholders of the Texas Fund; provided, however, that
after receipt of Texas 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 Texas 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 Texas Fund and
the Trust;
(ii) by the Texas Fund, if the Trust breaches in any material respect any of
its representations, warranties, covenants or agreements contained in this
Agreement;
(iii) by the Trust, if the Texas Fund breaches in any material respect any
of its representations, warranties, covenants or agreements contained in this
Agreement;
(iv) by either the Texas Fund or Trust, if the Closing has not occurred on
or prior to [September 30, 1996] (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);
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<PAGE> 22
(v) by the Trust in the event that: (a) all the conditions precedent to the
Texas 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
Trust gives the Texas Fund written assurance of its intent to close
irrespective of the satisfaction or nonsatisfaction of all conditions
precedent to the Trust's obligation to close, as set forth in Section 8 of
this Agreement; and (c) the Texas Fund then fails or refuses to close within
the earlier of five (5) business days or [September 30, 1996]; or
(vi) by the Texas Fund in the event that: (a) all the conditions precedent
to the 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 Texas Fund gives the Trust written assurance of its intent
to close irrespective of the satisfaction or nonsatisfaction of all the
conditions precedent to the Texas Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the Trust then fails or refuses to close
within the earlier of five (5) business days or [September 30, 1996].
10. REMEDIES.
In the event of termination of this Agreement by either or both of the Texas
Fund and 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 Trust's and the Texas 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 Trust or the Texas Fund be
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<PAGE> 23
obligated to indemnify the other if indemnity is not sought within ninety (90)
days of the expiration of the applicable Survival Period.
B. INDEMNIFICATION. 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 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 Indemnified Party 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 Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "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.
C. 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 give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
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 prior written
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
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<PAGE> 24
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 Texas Fund shall be addressed to the Texas
Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post Oak
Boulevard, Houston, TX 77056; Attention: General Counsel, or at such other
address as the Texas Fund may designate by written notice to the Trust. Notice
to the Trust shall be addressed to the 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 Trust may designate by written notice to the Texas
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 party hereto.
15. BOOKS AND RECORDS.
The Texas Fund and the Trust agree that copies of the books and records of the
Texas 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 Texas Fund to the Trust at the Closing
Date. In addition to, and without limiting the foregoing, the Texas Fund and the
Trust agree to take such action as may be necessary in order that the 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, 1993, December 31, 1994 and December 31, 1995;
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 Texas Fund and
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 Trust and Texas 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 Trust and the Texas 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
Trust, Municipal Fund or Texas Fund individually but binding only upon the
assets and property of the Municipal Fund or the Texas Fund the case may be.
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<PAGE> 26
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.
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND,
a Delaware business trust
By: ______________________________________
Title: ___________________________________
Attest: ___________________________________
Title: ____________________________________
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST,
a Delaware business trust
By: ______________________________________
Title: ___________________________________
Attest: ___________________________________
Title: ____________________________________
A-26
<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1996
REGISTRATION NOS. 2-99715
811-4386
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
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<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 39 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 40 /X/
</TABLE>
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)
(708) 684-6000
(Registrant's Telephone Number)
Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Secretary,
Van Kampen American Capital, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
(Name and Address of Agent for Service)
Copies to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE: (CHECK APPROPRIATE
BOX)
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
/ / ON (DATE) PURSUANT TO PARAGRAPH (B)
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
/ / ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
/ / ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE CHECK THE FOLLOWING:
/ / THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
DECLARATION PURSUANT TO RULE 24F-2
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND INTENDS TO
FILE WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM 24F-2 FOR ITS FISCAL
YEAR ENDING DECEMBER 31, 1996 ON OR BEFORE FEBRUARY 28, 1997
- --------------------------------------------------------------------------------
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<PAGE> 1
EXHIBIT 17(B)
PROXY
VAN KAMPEN AMERICAN CAPITAL TEXAS TAX FREE INCOME FUND
SPECIAL MEETING OF SHAREHOLDERS
July 26, 1996
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE VAN KAMPEN AMERICAN CAPITAL TEXAS
TAX FREE INCOME FUND.
The undersigned holder of shares of beneficial interest, par value $.01 per
share (the "Shares"), of the Van Kampen American Capital Texas Tax Free Income
Fund, a Delaware business trust (the "Texas Fund"), hereby appoint Ronald A.
Nyberg, Don G. Powell and Dennis J. McDonnell, 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 offices of Van Kampen American
Capital, Inc. One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on Tuesday,
September 10, 1996 at 2:00 p.m., and any and all adjournments thereof (the
"Special Meeting"), and thereat to vote all Shares 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>
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1. FOR AGAINST ABSTAIN
/ / / / / / The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the Texas Fund would (i)
transfer substantially all of its assets to the Van
Kampen American Capital Municipal Income Fund (the
"Municipal Fund") in exchange solely for Class A, B and C
shares of beneficial interest of the Municipal Fund and
the Municipal Fund's assumption of the liabilities of the
Texas Fund, (ii) distribute such shares of the Municipal
Fund to the holders of shares of the Texas Fund and (iii)
be dissolved, all 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
September 10, 1996.
Dated______________________ , 1996
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
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VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Texas Tax Free Income Fund, formerly known as
American Capital Texas Municipal Securities, Inc. (the "Fund"), is a mutual fund
whose objective is to provide as high a level of interest income exempt from
federal income tax and Texas state income tax, if any, as is consistent with the
Fund's investment policies. The Fund invests principally in Texas state,
municipal and local government obligations and obligations of other qualifying
issuers which are tax-exempt. The Fund currently is available for sale only in
Texas and other selected states specified under "Shareholder
Services -- Exchange Privilege." There can be no assurance that the objective of
the Fund will be achieved.
The Fund's Trustees have approved, subject to a vote of shareholders, a
reorganization of the Fund into Van Kampen American Capital Municipal Income
Fund. The proposal will be submitted to shareholders for approval in June, 1996.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is
(800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated January 30, 1996, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference into
this Prospectus. A copy of the Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or, for Telecommunications
Device For the Deaf, (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED JANUARY 30, 1996.
<PAGE> 2
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TABLE OF CONTENTS
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<TABLE>
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PAGE
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Prospectus Summary............................................... 3
Proposed Reorganization.......................................... 4
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expenses and Example....................... 7
Financial Highlights............................................. 9
The Fund......................................................... 11
Investment Objective and Policies................................ 11
Municipal Securities............................................. 15
Investment Practices............................................. 17
Investment Advisory Services..................................... 22
Alternative Sales Arrangements................................... 23
Purchase of Shares............................................... 27
Shareholder Services............................................. 36
Redemption of Shares............................................. 40
Distribution Plans............................................... 44
Distributions from the Fund...................................... 46
Tax Status....................................................... 46
Fund Performance................................................. 49
Description of Shares of the Fund................................ 51
Additional Information........................................... 52
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 3
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Texas Tax Free Income Fund (the "Fund") is
a non-diversified, open-end management investment company organized as a
Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVE. Interest income exempt from federal income taxes and Texas
state income taxes.
INVESTMENT POLICIES. The Fund invests principally in Texas state, municipal and
local government obligations and obligations of other qualifying issuers which
are tax-exempt.
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights." See also "Fund Performance."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Alternative
Sales Arrangements -- Factors for Consideration." Each class of shares
represents an interest in the same portfolio of investments of the Fund. The per
share dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Alternative Sales Arrangements." For
information on redeeming shares see "Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. The Fund pays an annual
service fee of up to 0.25% of its average daily net assets attributable to such
class of shares. See "Purchase of Shares -- Class A Shares" and "Distribution
Plans."
Class B Shares. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of 4% of redemption
proceeds during the first and second years, declining each year thereafter to
zero after the fifth year. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution Plans." Class B shares will convert automatically to
Class A shares six years after the end of the calendar month in which the
shareholder's order
3
<PAGE> 4
to purchase was accepted. See "Alternative Sales Arrangements -- Conversion
Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of 1% on redemptions made within
one year of purchase. See "Redemption of Shares." The Fund pays a combined
annual distribution fee and service fee of up to 1% of its average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution Plans." Class C shares will convert automatically to
Class A shares ten years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. The Fund declares dividends from net investment
income on each business day. Such dividends are distributed monthly. The daily
dividend is a fixed amount determined at least monthly which is not expected to
exceed the net income of the Fund for the month divided by the number of
business days during the month. Capital gains, if any, are distributed at least
annually. All dividends and distributions are automatically reinvested in shares
of the Fund at net asset value per share, without sales charge, unless payment
in cash is requested. See "Distributions from the Fund."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
is the distributor to the Fund.
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
- ------------------------------------------------------------------------------
PROPOSED REORGANIZATION
- ------------------------------------------------------------------------------
On January 26, 1996, the Trustees of the Fund approved an Agreement and Plan
of Reorganization between the Fund and Van Kampen American Capital Municipal
Income Fund, a series of Van Kampen American Capital Tax Free Trust (the
"Municipal Income Fund"), a fund advised by Van Kampen American Capital
Investment Advisory Corp., providing for the transfer of assets and liabilities
of the Fund to the Municipal Income Fund in exchange for shares of beneficial
interest of the Municipal Income Fund at its net assets value per share (the
"Reorganization").
Van Kampen American Capital Investment Advisory Corp. and the Adviser are
wholly owned subsidiaries of Van Kampen American Capital, Inc., which is a
wholly owned subsidiary of VK/AC Holding, Inc.
4
<PAGE> 5
The Reorganization is subject to approval by the holders of a majority of the
outstanding shares of the Fund. Further details of the proposed Reorganization
will be contained in the proxy statement/prospectus expected to be mailed to
shareholders in May, 1996.
The Municipal Income Fund had assets of $1.04 billion on January 26, 1996. Its
objective is to provide investors with a high level of current income exempt
from federal income tax, consistent with preservation of capital. The Municipal
Income Fund seeks to achieve its investment objective by investing at least 80%
of its assets in a diversified portfolio of tax-exempt municipal securities
rated investment grade at the time of investment.
The Fund will continue its normal operations prior to the Reorganization.
5
<PAGE> 6
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds).......... None(2) Year 1--4.00% Year 1--1.00%
Year 2--4.00%
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
- ---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
6
<PAGE> 7
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees (after reimbursement)
(as a percentage of average daily net
assets)............................... 0.30%(4) 0.30%(4) 0.30%(4)
12b-1 Fees(1) (as a percentage of
average daily net assets)............. 0.22% 1.00%(3) 1.00%(3)
Other Expenses(2) (as a percentage of
average daily net assets)............. 0.84% 0.84% 0.84%
Total Fund Operating Expenses (after
reimbursement) (as a percentage of
average daily net assets)............. 1.36%(5) 2.14%(5) 2.14%(5)
</TABLE>
- ---------------
(1) Up to 0.25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(2) See "Investment Advisory Services."
(3) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(4) After expense reimbursement. In the absence of such reimbursement,
management fees for all classes of shares would be 0.60%.
(5) After expense reimbursement. In the absence of such reimbursement, total
fund operating expenses would be 1.66%, 2.44% and 2.44%, for Class A, Class
B and Class C, respectively.
7
<PAGE> 8
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 1.36% for
Class A shares, 2.14% for Class B shares
and 2.14% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 61 $ 89 $118 $203
Class B............................... $ 63 $100 $132 $209*
Class C............................... $ 32 $ 67 $115 $247
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 61 $ 89 $118 $203
Class B............................... $ 22 $ 67 $115 $209*
Class C............................... $ 22 $ 67 $115 $247
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
8
<PAGE> 9
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout the
period indicated)
The following information has been audited by the Fund's independent
accountants, Price Waterhouse LLP, whose report thereon was unqualified. This
information should be read in conjunction with the related financial statements
and notes thereto included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
MARCH 2, 1992(1)
YEAR ENDED SEPTEMBER 30 THROUGH
------------------------------------- SEPTEMBER 30,
1995 1994 1993(2) 1992(2)
------- ------- ------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................................... $ 9.64 $10.36 $ 9.74 $ 9.45
------- ------- ------- --------
INCOME FROM OPERATIONS
Investment income..................................................... .67 .64 .63 .42
Expenses.............................................................. (.13) (.10) (.06) (.06)
------- ------- ------- --------
Net investment income................................................... .54 .54 .57 .36
Net realized and unrealized gains or losses on securities............... .39 (.7025) .65 .23
------- ------- ------- --------
Total from investment operations........................................ .93 (.1625) 1.22 .59
------- ------- ------- --------
LESS DISTRIBUTIONS FROM
Net investment income................................................. (.54) (.545) (.5875) (.30)
Net realized gains on securities...................................... -- (.0125) (.0125) --
------- ------- ------- --------
Total distributions..................................................... (.54) (.5575) (.60) (.30)
------- ------- ------- --------
Net asset value, end of period.......................................... $10.03 $ 9.64 $10.36 $ 9.74
======= ======= ======= ========
TOTAL RETURN(3)......................................................... 10.05% (1.62%) 12.94% 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................................... $11.1 $12.8 $18.0 $ 14.1
Ratios to average net assets (annualized)
Expenses.............................................................. 1.36% 1.03% .61% .93%
Expenses, without expense reimbursement............................... 1.66% 1.70% 1.86% 1.41%
Net investment income................................................. 5.51% 5.41% 5.74% 5.94%
Net investment income, without expense reimbursement.................. 5.21% 4.74% 4.49% 5.45%
Portfolio turnover rate................................................. 15% 10% 5% 4%
</TABLE>
(Table continued on following page)
9
<PAGE> 10
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------
JULY 27,
1992(1)
YEAR ENDED SEPTEMBER 30 THROUGH
--------------------------------- SEPTEMBER 30,
1995 1994 1993(2) 1992(2)
-------- --------- --------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.............................. $ 9.64 $ 10.35 $ 9.74 $ 9.91
-------- --------- --------- -------------
INCOME FROM OPERATIONS
Investment income................................................ .67 .65 .63 .09
Expenses......................................................... (.21) (.18) (.13) (.025)
-------- --------- --------- -------------
Net investment income............................................. .46 .47 .50 .065
Net realized and unrealized gains or losses on securities......... .396 (.7065) .633 (.103)
-------- --------- --------- -------------
Total from investment operations.................................. .856 (.2365) 1.133 (.038)
-------- --------- --------- -------------
LESS DISTRIBUTIONS FROM
Net investment income............................................ (.46) (.461) (.5105) (.132)
Excess of book-basis net investment income....................... (.006) -- -- --
Excess of book-basis net realized gains on securities............ -- (.0125) (.0125) --
-------- --------- --------- -------------
Total distributions............................................... (.466) (.4735) (.523) (.132)
-------- --------- --------- -------------
Net asset value, end of period.................................... $ 10.03 $ 9.64 $ 10.35 $ 9.74
======== ========= ========= =============
TOTAL RETURN(3)................................................... 9.11% (2.35%) 11.97% (.73%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).............................. $ 7.3 $ 8.6 $ 7.1 $ 0.9
Ratios to average net assets (annualized)
Expenses......................................................... 2.14% 1.80% 1.30% 1.41%
Expenses, without expense reimbursement.......................... 2.44% 2.47% 2.55% 2.15%
Net investment income............................................ 4.74% 4.66% 4.92% 3.83%
Net investment income, without expense reimbursement............. 4.44% 3.99% 3.67% 3.07%
Portfolio turnover rate........................................... 15% 10% 5% 4%
<CAPTION>
CLASS C
------------------------------------
AUGUST 30,
YEAR ENDED 1993(1)
SEPTEMBER 30 THROUGH
------------------- SEPTEMBER 30,
1995 1994(2) 1993(2)
-------- -------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.............................. $ 9.65 $10.36 $10.28
-------- -------- --------
INCOME FROM OPERATIONS
Investment income................................................ .67 .64 .05
Expenses......................................................... (.21) (.18) (.01)
-------- -------- --------
Net investment income............................................. .46 .46 .04
Net realized and unrealized gains or losses on securities......... .396 (.6965) .121
-------- -------- --------
Total from investment operations.................................. .856 (.2365) .161
-------- -------- --------
LESS DISTRIBUTIONS FROM
Net investment income............................................ (.46) (.461) (.081)
Excess of book-basis net investment income....................... (.006) -- --
Excess of book-basis net realized gains on securities............ -- (.0125) --
-------- -------- --------
Total distributions............................................... (.466) (.4735) (.081)
-------- -------- --------
Net asset value, end of period.................................... $10.04 $ 9.65 $10.36
========= ========= ========
TOTAL RETURN(3)................................................... 9.11% (2.35%) 1.57%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).............................. $ 1.1 $ 1.2 $ 0.1
Ratios to average net assets (annualized)
Expenses......................................................... 2.14% 1.79% .66%
Expenses, without expense reimbursement.......................... 2.44% 2.46% 1.89%
Net investment income............................................ 4.73% 4.59% 4.17%
Net investment income, without expense reimbursement............. 4.43% 3.92% 2.92%
Portfolio turnover rate........................................... 15% 10% 5%
</TABLE>
(1) Commencement of operations.
(2) Based on the average month-end outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
10
<PAGE> 11
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
The Fund is an open-end, non-diversified management investment company. This
type of company is commonly known as a mutual fund. A mutual fund provides, for
those who have similar investment goals, a practical and convenient way to
invest in a diversified portfolio of securities by combining their resources in
an effort to achieve such goals.
The Adviser determines the investment of the Fund's assets, provides
administrative services and manages the Fund's business and affairs. The Adviser
together with its predecessors, has been in the investment advisory business
since 1926.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The Fund is a non-diversified, open-end management investment company,
generally known as a mutual fund, originally organized as a Maryland corporation
on September 6, 1991 and reorganized on August 26, 1995, under the laws of the
State of Delaware as a business entity commonly known as a "Delaware business
trust," with an investment objective of providing as high a level of interest
income exempt from federal income tax and Texas state income tax, if any, as is
consistent with its investment policies. However, there can be no assurance that
the objective of the Fund will be achieved. The Fund invests primarily in
obligations issued by or on behalf of states, territories or possessions of the
United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest from which, in the opinion of bond
counsel for the issuer, is exempt from federal income tax ("Municipal
Securities").
Among the various types of Municipal Securities are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes. General obligations are backed by
the taxing power of the issuing municipality. Revenue obligations are backed by
the revenues of a project or facility-tolls from a toll-bridge, for example.
Industrial development revenue obligations are a specific type of revenue
obligation backed by the credit and security of a private user. Variable rate
demand notes and the risks thereof are described under "Investment
Practices -- Variable Rate Demand Notes."
The Fund maintains at least 80% of its net assets invested in Municipal
Securities except as a temporary defensive measure during periods of adverse
market conditions. At least 65% of the Fund's total assets will be invested in
securities issued by the State of Texas, its political subdivisions, agencies
and instrumentalities ("Texas Securities"). This is a fundamental policy and may
not be changed without the approval of at least a majority of the outstanding
shares of the Fund. The Fund
11
<PAGE> 12
does not invest in any securities except Municipal Securities and Temporary
Investments as defined below, except that the Fund may seek to hedge against
changes in interest rates through transactions in listed futures contracts
related to U.S. Government securities or based upon the Bond Buyers Municipal
Bond Index and options thereon. See "Investment Practices -- Futures Contracts
and Related Options."
On a temporary basis, to provide cash reserves or pending investment in
Municipal Securities, the Fund may invest up to 20% of its net assets in taxable
securities rated at the time of purchase by either Moody's Investor Service
("Moody's") as follows: Aaa through A by Moody's for bonds, MIG 1 through MIG 4,
or VMIG 1 through VMIG 4 for notes and Prime-1 through Prime-3 for commercial
paper; or by Standard & Poor's Corporation ("S&P") as follows: AAA through A for
bonds, SP-1 or SP-2 for notes and A-1 through A-3 for commercial paper; or, if
non-rated, are in the opinion of the Adviser, of comparable quality ("Temporary
Investments"). The Fund also may invest temporarily a greater proportion of its
assets in Temporary Investments for defensive purposes, when, in the judgment of
the Adviser, market conditions warrant. Temporary Investments include but are
not limited to securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; corporate bonds and debentures; certificates of
deposit and bankers' acceptances of domestic banks with assets of $500 million
or more and having deposits insured by the Federal Deposit Insurance
Corporation; commercial paper; repurchase agreements; and shares of tax-exempt
money market investment companies. See "Investment Practices -- Money Market
Investment Companies."
Interest received on certain otherwise tax-exempt securities which are
classified as "private activity bonds" (in general bonds that benefit
non-governmental entities) may be subject to an alternative minimum tax. The
percentage of the Fund's assets invested in "private activity bonds" will vary
during the year, but will not exceed 20%. See "Distributions from the
Fund -- Federal Income Taxes" for further discussion.
The Fund may invest up to ten percent of its net assets in illiquid securities
which include Municipal Securities issued in limited placements under which the
Fund represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Securities acquired in
limited placements generally may be resold only in a privately negotiated
transaction to one or more other institutional investors. Such limitation could
result in the Fund's inability to realize a favorable price upon disposition,
and in some cases might make disposition of such securities at the time desired
by the Fund impossible. The ten percent limitation applies at the time the
purchase commitments are made. See "Investment Practices -- Repurchase
Agreements."
12
<PAGE> 13
Differences with respect to the quality and maturity of portfolio investments
can be expected to affect the yield on the Fund and the degree of market and
financial risk to which the Fund is subject. Generally, Municipal Securities
with longer maturities tend to produce higher yields and are subject to greater
market fluctuations as a result of changes in interest rates than Municipal
Securities with shorter maturities and lower yields. In general, market prices
of Municipal Securities vary inversely with interest rates. Lower-rated
Municipal Securities generally provide a higher yield than higher-rated
Municipal Securities of similar maturity but are subject to greater market and
financial risk. The Fund may purchase short-term or long-term Municipal
Securities (with remaining maturities of up to 30 years or more). There is no
limitation on the average maturity of the Municipal Securities in the Fund and
such average maturity is likely to change from time to time based on the
Adviser's view of market conditions. The average maturity of the Municipal
Securities owned by the Fund on September 30, 1995, was 19.63 years. Municipal
Securities ratings of Moody's and of S&P are described in the Statement of
Additional Information. See also "Municipal Securities" herein.
At least 80% of the Municipal Securities purchased by the Fund are rated at
the time of purchase as determined by Moody's in the following quality grades:
Aaa through Baa for bonds, MIG 1 through MIG 4, or VMIG 1 through VMIG 4 for
notes and Prime-1 through Prime-3 for commercial paper; or as determined by S&P
in the following grades: AAA through BBB for bonds, SP-1 or SP-2 for notes and
A-1 through A-3 for commercial paper; or, if non-rated, are in the opinion of
the Adviser of comparable quality. The lowest rating in each category described
above is considered by the rating agency to be of adequate quality.
During the fiscal period ended September 30, 1995, the average percentage of
the Fund's assets invested in Municipal Securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), and the
non-rated debt securities, determined on a dollar weighted average, were as
follows:
<TABLE>
<S> <C>
AAA/Aaa...................................... 25.82%
AA/Aa........................................ 13.03%
A/A.......................................... 20.21%
BBB/Baa...................................... 17.62%
BB/Ba........................................ 0.84%
*Non-rated................................... 20.05%
Other Net Assets............................. 2.43%
--------
Total Net Assets.................... 100.00%
</TABLE>
- ------------
* The non-rated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: BBB - 20.05%.
13
<PAGE> 14
Up to 20% of the Municipal Securities purchased by the Fund may be obligations
rated BB or lower by S&P and Moody's or non-rated obligations which in the
opinion of the Adviser are of comparable quality. Such securities, (sometimes
referred to as high-yield, lower rated securities) are predominantly speculative
with respect to the capacity to pay interest and repay principal in accordance
with the terms of the security and generally involve a greater volatility of
price than securities in higher rating categories. The market prices of
high-yielding, lower-rated securities may fluctuate more than higher-rated
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates. In purchasing
such securities, the Fund will rely on the Adviser's judgment, analysis and
experience in evaluating the creditworthiness of the issuer of such securities.
The Adviser will take into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions and trends, its
operating history, the quality of its management and regulatory matters. The
Adviser has extensive experience in high-yield tax-exempt asset management. See
in the Statement of Additional Information "Municipal Securities -- Additional
Risks of Lower Rated Municipal Securities" and in the Appendix "Ratings of
Investments" for additional information regarding ratings of debt securities.
The Fund does not invest in obligations which are not currently paying interest
or which are rated C (lowest grade by Moody's) or which are rated C or D by S&P
or which are non-rated obligations considered by the Adviser to be of comparable
quality.
The Fund is registered as a "non-diversified" company under the 1940 Act. The
Fund intends to comply with Subchapter M of the Code which limits the aggregate
value of all holdings (except U.S. Government and cash items, as defined in the
Code), each of which exceeds 5% of the Fund's total assets, to an aggregate
amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of the Fund's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits,
"non-diversification" allows up to 50% of the total assets to be invested in as
few as two single issuers. In the event of a decline in the creditworthiness of
or default upon, the obligations of one or more such issuers exceeding five
percent, an investment in the Fund will entail greater risk than in funds which
have a policy of "diversification" because a high percentage of the Fund assets
may be invested in Municipal Securities of one or two issuers. Furthermore, a
high percentage of investments among few issuers may result in a greater degree
of fluctuation in the market value of the assets of the Fund because the Fund
will be more susceptible to economic, political, or regulatory developments
affecting these securities than would be the case with a fund composed of more
varied obligations of issuers. Also, the net asset value per share of the Fund
will tend to increase more when, for example, the assets invested in a limited
number of single issuers increase in value, and decrease more when such assets
decrease in value.
14
<PAGE> 15
The Fund ordinarily will invest at least 65% of its total assets in Texas
Securities, and, therefore, it is more susceptible to factors adversely
affecting issuers of Texas Securities than is a municipal bond mutual fund that
is not concentrated in issuers of Texas Securities to this degree. Such factors
include the economic condition of the State of Texas (the "State") and its
regions, pressures on the State budget resulting from decreases in federal
reimbursements or other factors, and litigation affecting issuers of Texas
Securities. Any circumstances that adversely affect the State's credit standing
may also affect the market value of securities of other issuers in the State,
either directly or indirectly, as a result of a dependency of local governments
and other authorities upon State aid and reimbursement programs.
Texas' economy continues to recover from the recession that began in the mid-
1980s due to declining oil prices and a collapse in the real estate industry.
The economy has become more stable due to increased diversification, with the
oil and gas industry diminishing in relative importance and the
service-producing sectors providing the major sources of job growth. The
preliminary unemployment rate for 1995 is 5.8%. The Comptroller of Public
Accounts predicts that the overall Texas economy will outpace national economic
growth in the long term by an annual average of one-half percentage point.
The 74th State Legislature passed a balanced 1996-97 biennial State budget in
May of 1995 without increasing State taxes. The State of Texas finished fiscal
1995 with a $2.110 billion positive cash balance in the General Revenue Fund.
This was the eighth consecutive year that Texas ended a fiscal year with a
positive balance in the General Revenue Fund.
The Adviser does not believe that the factors described above will have a
significant adverse effect on the Fund's investment in investment grade Texas
Securities or Municipal Securities. Because the Fund's portfolio will consist
primarily of investment grade securities, the Fund is expected to be less
subject to market and credit risks than a fund that invests in lower quality
Texas Securities or Municipal Securities. See the Statement of Additional
Information.
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MUNICIPAL SECURITIES
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Municipal Securities include debt obligations of a state, territory or
possession of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Securities may be issued include refunding outstanding
obligations, obtaining funds for general operating expenses and obtaining funds
to lend to other public institutions and
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<PAGE> 16
facilities. Certain types of Municipal Securities are issued to obtain funding
for privately operated facilities.
Many new issues of Municipal Securities are sold on a "when-issued" basis.
While the Fund has ownership rights to such Municipal Securities, the Fund does
not have to pay for them until they are delivered, normally 15 to 45 days later.
To meet that payment obligation, the Fund sets aside with the Custodian
sufficient cash or liquid securities equal to the amount that will be due. See
"Investment Practices -- Delayed Delivery and When-Issued Securities."
The yields of Municipal Securities depend on, among other things, general
market conditions, general conditions of the Municipal Securities market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P and Moody's represent their opinions of the quality of
the Municipal Securities they undertake to rate. It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon and rating may
have different yields while Municipal Securities of the same maturity and coupon
with different ratings may have the same yield.
The Fund considers investments in Municipal Securities not to be subject to
concentration policies and may invest a relatively high percentage of the assets
of the Fund in Municipal Securities issued by entities having similar
characteristics. The issuers may be located in the same geographic area or may
pay their interest obligations from revenue of similar projects such as
hospitals, utility systems and housing finance agencies. This may make the
Fund's investments more susceptible to similar economic, political or regulatory
occurrences. As the similarity in issuers increases, the potential for
fluctuation in the Fund's per share net asset value also increases. The Fund may
invest more than 25% of its total assets in Municipal Securities with similar
characteristics, such as industrial development revenue bonds, including
pollution control revenue bonds, housing finance agency bonds, or hospital
bonds. In such circumstances, economic, business, political or other changes
affecting one bond (such as proposed legislation affecting the financing of a
project; shortages or price increases of needed materials; or declining markets
or needs for the projects) may also affect other bonds in the same segment,
thereby potentially increasing market risk. The Fund may not, however, invest
more than 25% of its total assets in industrial development revenue bonds,
including pollution control bonds, issued for companies in the same industry.
See restriction 4 under "Investment Practices -- Investment Restrictions."
Sizeable investments in such obligations could involve an increased risk to the
Fund should any of such issuers or any such related projects or facilities
experience financial difficulties.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Securities. It may be expected that similar proposals may
be
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<PAGE> 17
introduced in the future. If any such proposal were to be enacted, the ability
of the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
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INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds ten percent of the value of its net assets. In the event of the
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are tax-
exempt obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand on the part of
the holder thereof to receive payment of the principal balance plus accrued
interest upon a specified notice period (usually seven to 30 days). There is,
however, the possibility that because of default or insolvency, the demand
feature of VRDNs or Participating VRDNs, described below, may not be honored.
The interest rates are
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<PAGE> 18
adjustable at intervals ranging from daily ("floating rate") to up to one year
to some prevailing market rate for similar investments, such adjustment formula
being calculated to maintain the market value of the VRDN at approximately the
par value of the VRDN upon the adjustment date. The adjustments are typically
set at a rate determined by the remarketing agent or based upon the prime rate
of a bank or some other appropriate interest rate adjustment index.
Investments by the Fund in VRDNs may also be made in the form of participation
interests ("Participating VRDNs") in variable rate tax-exempt obligations held
by a financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a bank or
dealer from which Municipal Securities are acquired agrees to purchase from the
Fund, at the Fund's option, the Municipal Securities at a specified price. Such
commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a "stand-by commitment" is
normally (i) the Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period.
"Stand-by commitments" generally can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than one year, and are
exercisable by the Fund at any time before the maturity of such obligations.
The Fund's right to exercise "stand-by commitments" is unconditional and
unqualified. A "stand-by commitment" generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Securities to a third party
at any time.
The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield-to-maturity
otherwise available for the
18
<PAGE> 19
same securities). The total amount paid in either manner for outstanding
"stand-by commitments" held in the Fund will not exceed 1/2 of 1% of the value
of the Fund's total assets calculated immediately after each "stand-by
commitment" is acquired. The Fund intends to enter into "stand-by commitments"
only with banks and dealers which, in the Adviser's opinion, present minimal
credit risks.
The Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a "stand-by commitment" would not affect the
valuation of the underlying Municipal Securities which would continue to be
valued in accordance with the method of valuation employed for the Fund in which
they are held. "Stand-by commitments" acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a "stand-by commitment," its costs would be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal Securities may at times
be purchased or sold on a delayed delivery or a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, often a month or more after the
purchase. The payment obligation and the interest rate are each fixed at the
time the Fund enters into the commitment. The Fund will only make commitments to
purchase such securities with the intention of actually acquiring the
securities, but the Fund may sell these securities prior to settlement date if
it is deemed advisable. Purchasing Municipal Securities on a when-issued basis
involves the risk that the yields available in the market when the delivery
takes place may actually be higher than those obtained in the transaction
itself; if yields so increase, the value of the when-issued obligation will
generally decrease. The Fund maintains a separate account at its custodian bank
consisting of cash or liquid high grade debt obligations, valued on a daily
basis, equal at all times to the amount of any when-issued commitment.
MONEY MARKET INVESTMENT COMPANIES. The Fund may invest in shares of open-end
investment companies which are tax-exempt money market funds. Such investment
would not exceed 3% of the total outstanding voting stock of the acquired
company; 5% of the value of the total assets of the Fund; or 10% of the total
assets of the acquired company as held by the Fund and all Van Kampen American
Capital funds. When the Fund invests in a tax-exempt money market fund, the
Adviser will reduce its advisory fee by the amount of any investment advisory
and administrative services fees paid to the investment adviser of the money
market fund.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in transactions in
listed futures contracts and related options. Such transactions may be in listed
futures contracts based upon The Bond Buyer Municipal Bond Index, a price
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<PAGE> 20
weighted measure of the market value of 40 large sized, recent issues of
tax-exempt bonds or in listed contracts based on U.S. Government securities.
Futures contracts and options thereon may be used for defensive hedging or
anticipatory hedging purposes, depending upon the composition of the Fund and
the Adviser's expectations concerning the securities markets. See the Statement
of Additional Information for discussion of futures contracts and related
options.
Potential Risks of Futures Contracts and Related Options. The purchase and
sale of futures contracts and related options involve risks different from those
involved with direct investments in securities. While utilization of futures
contracts and related options may be advantageous to the Fund, if the Adviser is
not successful in employing such instruments in managing the Fund's investments,
the Fund's performance will be worse than if the Fund did not make such
investments. In addition, the Fund would pay commissions and other costs in
connection with such investments, which may increase the Fund's expenses and
reduce its return. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts or call options
thereon by the Fund, an amount of cash, cash equivalent or liquid high grade
debt securities equal to the market value of the obligation under the futures
contracts or options (less any related margin deposits) will be maintained in a
segregated account with the custodian.
PORTFOLIO TURNOVER. The Fund may purchase or sell securities without regard to
the length of time the security has been held to take advantage of short-term
differentials in bond yields consistent with its objective of seeking tax-exempt
interest income. The Fund may engage in short-term trading if the anticipated
benefits are expected by the Adviser to exceed the transaction costs. The annual
turnover rate for the Fund is expected to vary from year to year depending on
market conditions. The annual turnover rate for the Fund is not expected to
exceed 100%. A 100% turnover rate would occur, for example, if all the
securities in the Fund were replaced in a period of one year. Municipal
Securities with remaining maturities of less than one year are excluded in the
computation of the portfolio turnover rate. Higher portfolio turnover involves
higher transaction costs and may result in realization of short-term capital
gains if securities are held for one year. Such gains are taxable to
shareholders as ordinary income except to the extent such gains are offset by
any capital losses. Portfolio turnover is not a limiting factor in making
portfolio decisions, except as limited by the Internal Revenue Code's
requirements for qualification as a regulated investment company. See "Federal
Tax Information" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund. The Municipal Securities and other obligations in which the Fund
invests
20
<PAGE> 21
are traded primarily in the over-the-counter market. Such securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission, although the prices of the securities
usually include a profit to the dealers. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
It is the policy of the Fund to obtain the best net results taking into account
such factors as price (including the applicable dealer spread), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Fund generally seeks reasonably competitive spreads or commissions,
the Fund will not necessarily be paying the lowest spread or commission
available. Brokerage commissions are paid on transactions in futures contracts
and options thereon. The Adviser is authorized to place portfolio transactions
with broker-dealers participating in the distribution of shares of the Fund and
other Van Kampen American Capital funds if it reasonably believes that the
quality of the execution and any commission are comparable to that available
from other qualified firms. The Adviser is authorized to pay higher commissions
to brokerage firms that provide it with investment and research information than
to firms which do not provide such services if the Adviser determines that such
commissions are reasonable in relation to the overall services provided.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the shareholders of the Fund.
These restrictions provide, among other things, the Fund may not:
1. Invest in securities other than Municipal Securities, Temporary
Investments (as defined herein), stand-by commitments, futures contracts
described in the next paragraph, and options on such contracts;
2. Purchase or sell commodities or commodity contracts except that the Fund
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of
Municipal Securities;
3. Borrow money, except the Fund may borrow from banks to meet redemptions
or for other temporary or emergency purposes, with such borrowing not to
exceed five percent of the total assets of the Fund at market value at
the time of borrowing. Any such borrowing may be secured provided that
not more than ten percent of the total assets of the Fund at market value
at the time of pledging may be used as security for such borrowings; or
4. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
21
<PAGE> 22
activities in the same industry; provided that this limitation shall not
apply to tax-exempt securities issued by governmental bodies or agencies
or instrumentalities thereof; so that industrial development bonds that
are considered to be issued by non-governmental users are subject to this
industry limitation.
Each state and each political subdivision, agency or instrumentality of such
state, and each multi-state agency of which a state is a member is a separate
"issuer" as that term is used in this Prospectus. The non-government user of
facilities financed by industrial development or pollution control securities is
also considered as a separate issuer. In certain circumstances, the guarantor of
a guaranteed security may also be considered to be an issuer in connection with
such guarantee.
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and over
$54 billion under management or supervision. Van Kampen American Capital's more
than 35 open-end and 38 closed-end funds and more than 2,800 unit investment
trusts are professionally distributed by leading financial advisers nationwide.
Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The General Partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than seven percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
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<PAGE> 23
ADVISORY AGREEMENTS. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser an annual fee of
0.60% of the first $300 million of the average net assets of the Fund; 0.55% of
the next $300 million of the average net assets of the Fund; and 0.50% of the
average net assets in excess of $600 million. The fees are payable monthly.
Under the Advisory Agreement, the Fund also reimburses the Adviser for the costs
of the Fund's accounting services, which include maintaining its financial books
and records and calculating the daily net asset value of the Fund. Operating
expenses paid by the Fund include shareholder service agency fees, service fees,
distribution fees, custodial fees, legal and accounting fees, the costs of
reports and proxies to shareholders, trustees' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fees and
total operating expense ratios are shown under the caption "Annual Fund
Operating Expenses and Example" herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interests.
PORTFOLIO MANAGEMENT. Joseph A. Piraro has been primarily responsible for the
day-to-day management of the Fund's investment portfolio since April 3, 1995.
Mr. Piraro is Vice President of the Adviser. Mr. Piraro has been employed by Van
Kampen American Capital Investment Advisory Corp., an affiliate of the Adviser,
since 1992. Prior to that time, Mr. Piraro was employed by First Chicago Capital
Markets.
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ALTERNATIVE SALES ARRANGEMENTS
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The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
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<PAGE> 24
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause such shares to have a higher expense ratio and to pay
lower dividends than those related to Class A shares. See "Purchase of Shares --
Class B Shares." Class B shares will automatically convert to Class A shares six
years after the end of the calendar month in which the shareholder's order to
purchase was accepted. See "Conversion Feature" herein for discussion on
applicability of the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The
24
<PAGE> 25
purpose of the conversion feature is to relieve the holders of the Class B
shares and Class C shares that have been outstanding for a period of time
sufficient for the Distributor to have been substantially compensated for
distribution expenses related to the Class B shares or Class C shares as the
case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for a reduced initial sales
charges or purchases at net asset value, as described herein under "Purchase of
Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of more than $500,000 for Class B shares or any order of more than $1
million for Class C shares.
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<PAGE> 26
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end shares charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
26
<PAGE> 27
"Distributions from the Fund." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers." Class A shares are sold with an initial sales charge; Class B and
Class C shares are sold without an initial sales charge and are subject to a
contingent deferred sales charge upon certain redemptions. See "Alternative
Sales Arrangements" for a discussion of factors to consider in selecting which
class of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms.
Initial investments in the Fund must be at least $500 and subsequent
investments must be at least $25. Both minimums may be waived by the Distributor
for shares involving periodic investments. Shares of the Fund may be sold in
foreign countries where permissible. The Fund and the Distributor reserve the
right to refuse any order for the purchase of shares. The Fund also reserves the
right to suspend the sale of the Fund's shares in response to conditions in the
securities markets or for other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares may also be purchased by completing the application accompanied
by this Prospectus and forwarding the application, through the designated
dealer, to ACCESS Investor Services, Inc. ("ACCESS"), a wholly-owned subsidiary
of Van Kampen American Capital. When purchasing shares of the Fund, investors
must specify whether the purchase is for Class A, Class B or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per
27
<PAGE> 28
share is computed as of the close of trading (currently 4:00 p.m. New York time)
on the New York Stock Exchange (the "Exchange") on each day such exchange is
open for trading. Net asset value per share for each class is determined by
dividing the value of all portfolio securities held by the Fund, cash and other
assets (including accrued interest), attributable to such class less all
liabilities (including accrued expenses) by the total number of shares of the
class outstanding. The Fund's investments are valued by an independent pricing
service.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the net asset
value next computed (plus applicable Class A sales charges) after an order is
received by a dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by dealers
after the close of the Exchange are priced based on the next close provided they
are received by the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit orders received by
them to the Distributor so they will be received prior to such time. Orders of
less than $500 are mailed by the dealer and processed at the offering price next
calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or
service fee is paid which relate to a specific class, and (iii) Class B and
Class C shares are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service options available.
See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The
net income attributable to Class B and Class C shares and the dividends payable
on Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fees. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund, with subsidiaries of The Travelers Inc.
28
<PAGE> 29
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediaries at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. These programs will not change the price
an investor will pay for shares or the amount that a Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
<S> <C> <C> <C>
- --------------------------------------------------------------------------
Less than $100,000................ 4.99% 4.75% 4.25%
$100,000 but less than $250,000... 3.90% 3.75% 3.25%
$250,000 but less than $500,000... 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000...................... 2.04% 2.00% 1.75%
$1,000,000 and over............... * * *
- --------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1% in the event of certain redemptions within one
year of the purchase. The contingent deferred sales charge incurred upon
redemption is paid
29
<PAGE> 30
to the Distributor in reimbursement for distribution-related expenses. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions, which may include banks,
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described in the preceding table.
Such financial institutions, other industry professionals and dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The Distributor does not
believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund. State securities laws regarding
registration of banks and other financial institutions may differ from the
interpretation of federal law expressed herein and banks and other financial
institutions may be required to register as dealers pursuant to certain state
laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or
30
<PAGE> 31
other fiduciary purchasing for a single fiduciary account, or a "company" as
defined in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the
indicated Fund, or in any combination of shares of such Funds and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
Cumulative Purchase Discount. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchase amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustment in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application accompanied by this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or
31
<PAGE> 32
the Distributor. The Fund reserves the right to modify or terminate these
arrangements at any time.
Unit Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Fund, other Participating Funds, Tax Free Money Fund or Reserve Fund with
no minimum initial or subsequent investment requirement, and with a lower sales
charge if the administrator of an investor's unit investment trust program meets
certain uniform criteria relating to cost savings by the Fund and the
Distributor. The total sales charge for all investments made from unit trust
distributions will be one percent of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an
32
<PAGE> 33
investment subadviser to any fund described in (1) above or an affiliate
of such subadviser; and such persons' families and their beneficial
accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13-month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Participants with accounts established after October 12, 1995, in any
405(b)(7) program of a college or university system which permits only net
asset value mutual fund investments and for which Van Kampen American
Capital Trust Company serves as custodian. In connection with such
purchases, the Distributor may pay, out of its own assets, a commission to
brokers, dealers, or financial intermediaries as follows: one percent on
sales up to $5 million, plus 0.50% on the next $5 million, plus 0.25% on
the excess over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
33
<PAGE> 34
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -----------------------------------------------------------------
<S> <C>
First.............................................. 4.0%
Second............................................. 4.0%
Third.............................................. 3.0%
Fourth............................................. 2.5%
Fifth.............................................. 1.5%
Sixth.............................................. None
- -----------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five-year period. The charge is not applied to dollar amounts
representing an increase in the net asset value since the time of purchase.
34
<PAGE> 35
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1%. The charge is assessed on an amount
equal to the lower of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and second of shares held for more than one year or shares acquired
pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1% of the purchase amount will be paid to
broker-dealers and other Service Organizations at the time of purchase. Broker-
dealers and other Service Organizations will also be paid ongoing commissions
and transaction fees of up to 0.75% of the average daily net assets of the
Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation to Service Organizations
that sell Class C shares of the Fund.
35
<PAGE> 36
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." A contingent deferred sales
charge is waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in certain of the
Participating Funds or Reserve may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received,
ACCESS will calculate no more than
36
<PAGE> 37
two percent of the net asset value of the issued shares, and bill the party to
whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share, without sales
charge, on the record date. The reinvestment privilege is automatic unless the
shareholder instructs otherwise. This instruction may be made by telephone by
calling (800) 421-5666 ((800) 772-8889 for the hearing impaired). The investor
may, on the initial application or prior to any declaration, instruct that
dividends be paid in cash and capital gains distributions be reinvested at net
asset value, or that both dividends and capital gains distributions be paid in
cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in shares of the Fund. Additional
information is available from the Distributor or authorized investment dealers.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application accompanied by this
Prospectus, or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, Tax Free Money
Fund or Reserve Fund.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
37
<PAGE> 38
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of shares of any other fund
without sales charge, provided that shares of certain other Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
without Adviser approval. Shares of Government Target may be exchanged for Class
A shares of the Fund without sales charge. Class A shares of Tax Free Money Fund
or Reserve Fund that were not acquired in exchange for Class B or Class C shares
of a Participating Fund may be exchanged for Class A shares of the Fund upon
payment of the excess, if any, of the sales charge rate applicable to the shares
being acquired over the sales charge rate previously paid. Shares of Tax Free
Money Fund or Reserve Fund acquired through an exchange of Class B or Class C
shares may be exchanged only for the same class of shares of a Participating
Fund without incurring a contingent deferred sales charge. Shares of any
Participating Fund, Tax Free Money Fund or Reserve Fund may be exchanged for
shares of any other Participating Fund if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption of
the original shares. For purposes of computing the contingent deferred sales
charge payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B or
Class C shareholders remain subject to the contingent deferred sales charge
imposed by the fund initially purchased by the shareholder upon their redemption
from the Van Kampen American Capital complex of funds. The contingent deferred
sales charge is based on the holding period requirements of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application accompanied by this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
38
<PAGE> 39
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See both
"Purchase of Shares" and "Redemption of Shares." If the exchanging shareholder
does not have an account in the fund whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification) and dealer of record as the
account from which shares are exchanged, unless otherwise specified by the
shareholder. In order to establish a systematic withdrawal plan for the new
account or reinvest dividends from the new account into another fund, however,
an exchanging shareholder must file a specific written request. The Fund
reserves the right to reject any order to acquire its shares through exchange.
In addition, the Fund may modify, restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
A prospectus of any of the Participating Funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined
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net asset value. If periodic withdrawals continuously exceed reinvested
dividends and capital gains distributions, the shareholder's original investment
will be correspondingly reduced and ultimately exhausted. Withdrawals made
concurrently with purchase of additional shares ordinarily will be
disadvantageous to the shareholder because of the duplication of sales charges.
Any taxable gain or loss will be recognized by the shareholder upon the
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to ACCESS, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of shares is a taxable event. Since the net
asset value per share of the Fund is likely to fluctuate daily, check writing
redemptions can result in such a taxable event. See "Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
days, unless such Class A shares have been paid for by bank wire. Any Class A
shares for which there are outstanding certificates may not be redeemed by
check. If the amount of the check is greater than the value of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Accounts that are subject to backup withholding are not
eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.
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REDEMPTION OF SHARES
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REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be
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<PAGE> 41
sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B or
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of 1% may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more. The contingent deferred sales charge incurred upon redemption is paid to
the Distributor in reimbursement for distribution-related expenses. See
"Purchase of Shares." A custodian of a retirement plan account may charge fees
based on the custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian and forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA, 403(b)(7) or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen American Capital
Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian
for information.
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<PAGE> 42
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share of the Fund next determined after the
request is received in proper form. Payment for shares redeemed is made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application accompanied
by this Prospectus or call the Fund at (800) 421-5666 to request that a copy of
the Telephone Redemption Authorization form be sent to them for completion. To
redeem shares contact the telephone transaction line at (800) 421-5684. VKAC and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. VKAC and the
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares
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<PAGE> 43
represented by certificates. If an account has multiple owners, ACCESS may rely
on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B and
Class C shares will be waived where the disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the initial determination of disability.
This waiver of the contingent deferred sales charge on Class B and Class C
shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares
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<PAGE> 44
- -- Waiver of Contingent Deferred Sales Charge" and the Statement of Additional
Information. Reinstatement at net asset value is also offered to participants in
those eligible retirement plans held or administered by Van Kampen American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
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DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company board of directors and approved by
its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit the annual distribution charges and service fees that a mutual fund may
impose on a class of shares. The NASD Rules also limit the aggregate amount
which the Fund may pay for such distribution costs. Under the Class A Plan, the
Fund pays a service fee to the Distributor at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class A
shares. Under the Class B Plan and the Class C Plan, the Fund pays a service fee
to the Distributor at an annual rate of up to 0.25% and a distribution fee at an
annual rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B shares or Class C shares to reimburse the
Distributor for service fees paid by it to Service Organizations and for its
distribution costs.
The Distribution Plans provide that the Distributor shall use the Class A,
Class B and Class C service fees to compensate Service Organizations for
personal services and/or the maintenance of shareholder accounts. Under the
Class B Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class B shares as reimbursement for (i) upfront commissions and
transaction fees of up to 4% of the purchase price of Class B shares purchased
by the clients of broker-dealers and other Service Organizations, and (ii) other
distribution expenses as described in the Statement of Additional Information.
Under the Class C Plan, the Distributor receives additional payments from the
Fund at the annual rate of up to 0.75% of the net assets of the Class C shares
as reimbursements for (i) upfront commissions and transaction fees of up to
0.75% of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees of up to 0.75% of the average daily net assets of the
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<PAGE> 45
Fund's Class C shares and (ii) other distribution expenses as described in the
Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
Service Organizations with respect to such shares. In this regard, the purpose
and function of the combined contingent deferred sales charge and distribution
fee are the same as those of the initial sales charge with respect to the Class
A shares of the Fund in that in both cases such charges provide for the
financing of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class B Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class B
Plan, the balance of $100,000 would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1995, the unreimbursed
expenses incurred by the Distributor under the Class B Plan and carried forward
were approximately $301,000 or 3.96% of the Class B shares' average daily net
assets. For the plan year ended June 30, 1995, the unreimbursed expenses
incurred by the Distributor under
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<PAGE> 46
the Class C Plan and carried forward were approximately $16,000 or 1.38% of the
Class C shares' average daily net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
DIVIDEND POLICY. The Fund declares dividends from net investment income on
each business day. Such dividends are distributed monthly. The daily dividend is
a fixed amount determined at least monthly which is not expected to exceed the
net income of the Fund for the month divided by the number of business days
during the month. The Fund intends to distribute after the end of a fiscal year
the net capital gains, if any, realized during the fiscal year except to the
extent that such gains are offset by capital loss carryovers. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
reinvested in additional shares of the Fund. See "Shareholder Services --
Reinvestment Plan."
Shares (other than shares acquired through an exchange) become entitled to
dividends declared on the day ACCESS receives payment for the shares, and remain
entitled to dividends through the day such shares are priced for redemption.
With respect to shares acquired through an exchange, such shares become entitled
to dividends on the day after ACCESS receives payment for the shares, and
remains entitled to dividends through the day such shares are purchased for
payment on redemption. Therefore, if a dealer delays forwarding to ACCESS
payment for shares which an investor has made to the dealer, this will in effect
cost the investor money because it will delay the date upon which he or she
becomes entitled to dividends.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
incremental transfer agency fees applicable to such classes of shares.
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXES. The Fund has qualified and intends to be taxed as a
"regulated investment company" under the Code by meeting certain requirements of
the Code. In addition, the Fund intends to invest in sufficient Municipal
Securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by the Fund from the net tax-exempt interest earned from
Municipal Securities qualify as exempt-interest dividends if, at the close of
each quarter of the fiscal year, at least 50% of the value of the total assets
of the Fund consists of Municipal
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<PAGE> 47
Securities. See "Federal Tax Information" in the Statement of Additional
Information.
Exempt-interest dividends paid to shareholders are not includable in the
shareholders' gross income for federal income tax purposes. The percentage of
the total dividends paid by the Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of the Fund
receiving dividends during such year. Shareholders not subject to tax on their
income will not be required to pay tax on amounts distributed to them.
Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on individuals
and corporations. The Fund invests a portion of its assets in Municipal
Securities subject to this provision so that a portion of its exempt-interest
dividends will be an item of tax preference to the extent such dividends
represent interest received from these private-activity bonds. For the fiscal
period ending September 30, 1993, approximately 12.23% of the Fund's income
consisted of interest on private-activity bonds. The Tax Reform Act also imposes
per capita volume limitations on certain private-activity bonds which could
limit the amount of such bonds available for investment by the Fund.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gains. One such provision affects tax-exempt
securities by requiring that gains on such securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law.
The Fund is subject to the requirement that at least 80% of its assets be
invested in securities the income from which is exempt from both regular federal
income tax and the federal alternative minimum tax.
Distributions of net investment income received by the Fund from investments
in debt securities other than Municipal Securities, and any net realized
short-term capital gains distributed by the Fund are taxable to shareholders as
ordinary income. Any distribution of net long-term capital gains by the Fund is
subject to capital gains tax rates. Interest on indebtedness which is incurred
to purchase or carry shares of a mutual fund which distributes exempt-interest
dividends during the year is not deductible for federal income tax purposes.
Shareholders are notified annually of the federal tax status of dividends and
any distributions paid by the Fund during the fiscal year.
Individuals whose modified income exceeds a base amount are subject to federal
income tax on up to one-half of their Social Security benefits. Modified income
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<PAGE> 48
includes adjusted gross income, one-half of Social Security benefits and
tax-exempt interest, including tax-exempt interest dividends from the Fund.
To avoid being subject to a 31% federal back-up withholding tax on dividends
(except exempt-interest dividends), capital gains distributions and redemption
payments, shareholders must furnish the Fund with a certification of their
correct taxpayer identification number.
The foregoing is a brief summary of some of the important tax considerations
generally affecting the Fund and its investors who are U.S. residents or U.S.
corporations. Additional tax information of relevance to particular investors,
including corporations and investors who may be "substantial users" of
facilities financed by Municipal Securities, is contained in the Statement of
Additional Information. Investors are urged to consult their tax advisers with
specific reference to their own tax situation. Foreign investors should consult
their own counsel for further information as to the U.S. and their country of
residence or citizenship tax consequences of receipt of dividends and
distributions from the Fund.
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. The Fund's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Code, including the requirement that the Fund
derive less than 30% of its gross income from the sale or other disposition of
securities held for less than three months. Gains and losses recognized by the
Fund from transactions in futures contracts and options thereon constitute
capital gains and losses for federal income tax purposes. See "Federal Tax
Information" in the Statement of Additional Information. To the extent such
activities result in net realized short-term capital gains which are distributed
to shareholders, such distributions constitute taxable ordinary income. To the
extent such activities result in net realized long-term capital gains which are
distributed to shareholders, such distributions constitute taxable long-term
capital gains.
STATE AND LOCAL TAXES. The exemption of interest income for federal income tax
purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that investors consult their tax advisers for information in this
regard. Dividends and distributions paid by the Fund from sources other than
tax-exempt interest are generally subject to taxation at the state and local
levels. Dividends or distributions paid by the Fund to Texas residents are not
subject to taxation by Texas, because Texas does not impose a personal income
tax at this time.
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<PAGE> 49
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one-year, five-year and ten-year periods or for the life of the
Fund. Other total return quotations, aggregate or average, over other time
periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%. Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution and other fees, the total returns for each of the classes will
differ.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semi-annual compounding. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a Fund shareholder.
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<PAGE> 50
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
To increase the Fund's yield the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of
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mutual funds; or with municipal bond indices, such as Lehman Brothers Municipal
Bond Index or Bond Buyer's Index of 25 Revenue Securities or with the Consumer
Price Index, Dow Jones Industrial Average, Standard & Poor's, NASDAQ, other
appropriate indices of investment securities, or with investment or savings
vehicles. The performance information may also include evaluations of the Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily, Kiplinger's Personal
Finance Magazine, Money, Mutual Fund Forecaster, Stanger's Investment Advisor,
USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce Fund performance. The
Fund will include performance data for Class A, Class B and Class C shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in the State of Maryland on September 6,
1991 and reorganized on August 26, 1995, under the laws of the state of Delaware
as a business entity commonly known as a "Delaware business trust." It is
authorized to issue an unlimited number of Class A, Class B and Class C shares
of beneficial interest of $0.01 par value. Other classes of shares may be
established from time to time in accordance with provisions of the Fund's
Declaration of Trust. Shares issued by the Fund are fully paid, non-assessable
and have no pre-emptive or conversion rights.
The Fund currently offers three classes, designated Class A shares, Class B
shares and Class C shares. Each class of shares represents an interest in the
same assets of the Fund and generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. See "Distribution Plans."
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The Fund is permitted to issue an unlimited number of classes. Each class of
shares is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, pre-emptive or other subscription rights,
except with respect to the conversion of Class B shares and Class C shares into
Class A shares as described above. In the event of liquidation, each of the
shares of the Fund is entitled to its portion of all of the Fund's net assets
after all debt and expenses of the Fund have been paid. Since Class B shares and
Class C shares pay higher distribution expenses, the liquidation proceeds to
Class B shareholders and Class C shareholders are likely to be lower than to
other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR TELEPHONE TRANSACTIONS
DIAL (800) 421-5684
VAN KAMPEN AMERICAN CAPITAL
TEXAS TAX FREE INCOME FUND
- ------------------
2800 Post Oak Blvd.
Houston, TX 77056
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
Legal Counsel
O'MELVENY & MYERS
400 South Hope Street
Los Angeles, CA 90071
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 54
TEXAS TAX FREE
INCOME FUND
------------------------------------------------------------------------
P R O S P E C T U S
JANUARY 30, 1996
--- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ---
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
