<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1996
REGISTRATION NOS. 2-99715
811-4386
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains seven Prospectuses and eight
Statements of Additional Information describing eight series of the Registrant
(the "Applicable Series"). The Registration Statement is organized as follows:
Facing Page
Cross Reference Sheets with respect to the Applicable Series, in the
following order:
<TABLE>
<C> <S>
(i) Van Kampen American Capital Tax Free High Income Fund
(ii) Van Kampen American Capital Insured Tax Free Income Fund and Van
Kampen American Capital California Insured Tax Free Fund
(iii) Van Kampen American Capital Municipal Income Fund
(iv) Van Kampen American Capital Intermediate Term Municipal Income Fund
(v) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vi) Van Kampen American Capital New Jersey Tax Free Income Fund
(vii) Van Kampen American Capital New York Tax Free Income Fund
</TABLE>
Prospectuses with respect to the Applicable Series, in the following order:
<TABLE>
<C> <S>
(i) Van Kampen American Capital Tax Free High Income Fund
(ii) Van Kampen American Capital Insured Tax Free Income Fund and Van
Kampen American Capital California Insured Tax Free Fund
(iii) Van Kampen American Capital Municipal Income Fund
(iv) Van Kampen American Capital Intermediate Term Municipal Income Fund
(v) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vi) Van Kampen American Capital New Jersey Tax Free Income Fund
(vii) Van Kampen American Capital New York Tax Free Income Fund
</TABLE>
Statements of Additional Information with respect to the Applicable Series,
in the following order:
<TABLE>
<C> <S>
(i) Van Kampen American Capital Tax Free High Income Fund
(ii) Van Kampen American Capital Insured Tax Free Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
</TABLE>
Part C Information
Exhibits
-------------------------
The Prospectus and Statement of Additional Information with respect to each
of Van Kampen American Capital California Tax Free Income Fund, Van Kampen
American Capital Michigan Tax Free Income Fund, Van Kampen American Capital
Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax Free
Income Fund, four other series of the Registrant, included in Post-Effective
Amendment No. 31 to the Registration Statement of the Registrant, are included
herein by reference and no changes thereto are affected hereby.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
PRACTICES; INVESTMENT ADVISORY SERVICES; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or Repurchase.... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(i)
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Investment
Advisory and Other Services; Trustees and Officers;
The Distributor; Legal Counsel; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in the Prospectus under caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Trustees and Officers
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(ii)
<PAGE> 5
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... SHAREHOLDER TRANSACTION EXPENSES--INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--
CALIFORNIA INSURED FUND; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLES--
INSURED FUND; ANNUAL FUND OPERATING EXPENSES AND
EXAMPLES--CALIFORNIA INSURED FUND; FUND PERFORMANCE
Item 3. Condensed Financial
Information............... FINANCIAL HIGHLIGHTS--INSURED FUND; FINANCIAL
HIGHLIGHTS--CALIFORNIA INSURED FUND
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUNDS; INVESTMENT OBJECTIVES
AND POLICIES; MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; INSURANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--INSURED
FUND; ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--
CALIFORNIA INSURED FUND; INVESTMENT PRACTICES;
INVESTMENT ADVISORY SERVICES; SHAREHOLDER SERVICES;
THE DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM
THE FUNDS
Item 6. Capital Stock and
Other Securities.......... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
SHAREHOLDER SERVICES; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM THE
FUNDS; TAX STATUS; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES-- INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--CALIFORNIA INSURED
FUND; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; REDEMPTION OF SHARES;
THE DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM
THE FUNDS; FUND PERFORMANCE
Item 8. Redemption or Repurchase.... SHAREHOLDER TRANSACTION EXPENSES-- INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--CALIFORNIA INSURED
FUND; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; REDEMPTION OF SHARES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(iii)
<PAGE> 6
<TABLE>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Investment Advisory and Other Services;
Custodian and Independent Auditors; Trustees and
Officers; The Distributor; Legal Counsel; Notes to
Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocations
Item 18. Capital Stock and
Other Securities.......... The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the captions:
FINANCIAL HIGHLIGHTS--INSURED FUND; FINANCIAL
HIGHLIGHTS--CALIFORNIA INSURED FUND; Independent
Auditors' Report; Financial Statements; Notes to
Financial Statements; Trustees and Officers
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(iv)
<PAGE> 7
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
--------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FUND PERFORMANCE
Item 3. Condensed Financial
Information............... FINANCIAL HIGHLIGHTS
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SPECIAL CONSIDERATIONS REGARDING THE FUND; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES;
INVESTMENT PRACTICES; INVESTMENT ADVISORY SERVICES;
SHAREHOLDER SERVICES; THE DISTRIBUTION AND SERVICE
PLANS; DISTRIBUTIONS FROM THE FUND
Item 6. Capital Stock and
Other Securities.......... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
SHAREHOLDER SERVICES; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM THE
FUND; TAX STATUS; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; DISTRIBUTIONS FROM THE FUND; FUND
PERFORMANCE
Item 8. Redemption or Repurchase.... SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(v)
<PAGE> 8
<TABLE>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Investment Advisory and Other Services;
Trustees and Officers; The Distributor; Legal Counsel;
Notes to Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocations
Item 18. Capital Stock and
Other Securities.......... The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the captions:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Trustees and Officers
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(vi)
<PAGE> 9
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
PRACTICES; INVESTMENT ADVISORY SERVICES; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or Repurchase.... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(vii)
<PAGE> 10
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Shares of the Fund; Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Custodian and Independent Auditors; Investment
Advisory and Other Services; Trustees and Officers;
The Distributor; Legal Counsel; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in the Prospectus under caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered............. Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under captions: TAX STATUS;
Tax Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the caption:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Trustees and Officers
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(viii)
<PAGE> 11
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT
OBJECTIVE AND POLICIES; MUNICIPAL SECURITIES;
INVESTMENT PRACTICES; SPECIAL CONSIDERATIONS REGARDING
THE FUND; SHAREHOLDER SERVICES; DESCRIPTION OF SHARES
OF THE FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
PRACTICES; INVESTMENT ADVISORY SERVICES; ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>
(ix)
<PAGE> 12
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Fund...................... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND
PERFORMANCE; FINANCIAL HIGHLIGHTS; Performance
Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditor's Report; Financial
Statements; Notes to Financial Statements; Trustees
and Officers
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(x)
<PAGE> 13
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND;
INVESTMENT OBJECTIVE AND POLICIES;
MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; SPECIAL CONSIDERATIONS REGARDING THE FUND;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT PRACTICES; INVESTMENT ADVISORY
SERVICES; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>
(xi)
<PAGE> 14
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Fund...................... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND
PERFORMANCE; FINANCIAL HIGHLIGHTS; Performance
Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditor's Report; Financial
Statements; Notes to Financial Statements; Trustees
and Officers
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(xii)
<PAGE> 15
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information............... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS;
FUND PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND;
INVESTMENT OBJECTIVES AND POLICIES;
MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; SPECIAL CONSIDERATIONS REGARDING THE FUND;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Funds..................... ANNUAL FUND OPERATING EXPENSES
AND EXAMPLE; INVESTMENT PRACTICES; INVESTMENT ADVISORY
SERVICES; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; DESCRIPTION OF SHARES OF THE
FUND; ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase................ ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings............... Not Applicable
PART B
Item 10. Cover Page.................. Cover Page
</TABLE>
(xiii)
<PAGE> 16
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... Contained in Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions;
Additional Investment Considerations
Item 14. Management of the
Funds..................... Trustees and Officers
Item 15. Control Persons and
Principal Holders of
Securities................ Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; Trustees and Officers
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Custodian and Independent Auditors; Legal Counsel;
Investment Advisory and Other Services; Trustees and
Officers; The Distributor; Notes to Financial
Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND
PERFORMANCE; FINANCIAL HIGHLIGHTS; Performance
Information
Item 23. Financial Statements........ Contained in Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditor's Report; Financial
Statements; Notes to Financial Statements; Trustees
and Officers
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(xiv)
<PAGE> 17
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
TAX FREE HIGH INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Tax Free High Income Fund (the "Fund") is a
separate diversified mutual fund organized as a series of Van Kampen American
Capital Tax Free Trust. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income taxes primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities. The Fund may invest in medium and lower grade municipal
securities rated between BBB and B- (inclusive) by Standard & Poor's Ratings
Group, Baa and B3 (inclusive) by Moody's Investors Service, Inc., comparably
rated short-term municipal obligations and municipal securities determined by
the Fund's investment adviser to be of comparable quality. Municipal securities
in which the Fund may invest include conventional fixed-rate municipal
securities, variable rate municipal securities and other types of municipal
securities described herein. See "Municipal Securities." There is no assurance
that the Fund will achieve its investment objective.
Investment in medium and lower grade municipal securities involves special
risks as compared with investment in higher grade municipal securities,
including potentially greater sensitivity to a general economic downturn,
greater market price volatility and less liquid secondary market trading. See
"Municipal Securities -- Special Considerations and Risk Factors Regarding
Medium and Lower Grade Municipal Securities." Investment in the Fund may not be
appropriate for all investors.
------------------ (Continued on next page.)
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Statement of Additional Information may be
obtained without charge, by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 18
(Continued from previous page.)
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth certain information about the Fund
that a prospective investor should know before investing. Please read and retain
this Prospectus for future reference. The address of the Fund is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is (800)
421-5666.
2
<PAGE> 19
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 8
Annual Fund Operating Expenses and Example..................... 9
Financial Highlights........................................... 11
The Fund....................................................... 13
Investment Objective and Policies.............................. 13
Municipal Securities........................................... 16
Investment Practices........................................... 21
Investment Advisory Services................................... 23
Alternative Sales Arrangements................................. 25
Purchase of Shares............................................. 27
Shareholder Services........................................... 36
Redemption of Shares........................................... 40
The Distribution and Service Plans............................. 43
Distributions from the Fund.................................... 45
Tax Status..................................................... 46
Fund Performance............................................... 49
Description of Shares of the Fund.............................. 51
Additional Information......................................... 52
Appendix A: Description of Municipal Securities Ratings........ 53
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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.
3
<PAGE> 20
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Tax Free High Income Fund (the "Fund") is
a separate diversified series of Van Kampen American Capital Tax Free Trust (the
"Trust"), an open-end management investment company organized as a Delaware
business trust. See "The Fund."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income taxes primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities.
INVESTMENT POLICIES. Municipal securities in which the Fund may invest include
fixed and variable rate securities, municipal notes, municipal leases, tax
exempt commercial paper, custodial receipts, participation certificates and
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions (as defined herein) in
which the Fund may engage. The Fund may invest up to 15% of its total assets in
derivative variable rate securities such as inverse floaters, whose rates vary
inversely with changes in market rates of interest or range or capped floaters,
whose rates are subject to periodic or lifetime caps. The Fund may invest in
medium and lower grade municipal securities rated, at the time of investment,
between BBB and B- (inclusive) by Standard & Poor's Ratings Group ("S&P"), Baa
and B3 (inclusive) by Moody's Investors Service, Inc. ("Moody's"), comparably
rated short-term municipal obligations and municipal securities determined by
Van Kampen American Capital Investment Advisory Corp. (the "Adviser"), the
Fund's investment adviser, to be of comparable quality. There is no assurance
that the Fund will achieve its investment objective.
Medium grade municipal securities are those rated BBB by S&P or Baa by
Moody's, comparably rated short-term municipal obligations and municipal
securities determined by the Adviser to be of comparable quality. Municipal
securities rated BBB by S&P generally are regarded by S&P as having an adequate
capacity to pay interest and repay principal; adverse economic conditions or
changing circumstances are, however, more likely in S&P's view to lead to a
weakened capacity to pay interest and repay principal as compared with higher
rated municipal securities. Municipal securities rated Baa by Moody's generally
are considered by Moody's as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. In Moody's view, 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. In
4
<PAGE> 21
Moody's view, such securities lack outstanding investment characteristics and
have speculative characteristics as well.
The Fund may invest in lower grade municipal securities rated, at the time of
investment, either not lower than B- by S&P or not lower than B3 by Moody's, in
comparably rated short-term municipal obligations and in municipal securities
determined by the Adviser to be of comparable quality. Municipal securities
rated B by S&P generally are regarded by S&P, on balance, as predominantly
speculative with respect to capacity to pay interest or repay principal in
accordance with the terms of the obligation. While such securities will likely
have some quality and protective characteristics, in S&P's view these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
Securities rated B by Moody's are viewed by Moody's as generally lacking
characteristics of the desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
The Fund will not make initial investments in municipal securities rated, at
the time of investment, below B- by S&P and below B3 by Moody's, in comparably
rated short-term municipal obligations or in municipal securities determined by
the Adviser to be of comparable quality. The Fund may retain municipal
securities which are downgraded after investment. There is no minimum rating
with respect to municipal securities which may be retained in the Fund's
portfolio, and the Fund may thus hold securities that are in default, or with
respect to which payment of interest and/or repayment of principal is in
arrears. A complete description of the various S&P and Moody's rating categories
is included as Appendix A to this Prospectus.
Investment in medium and lower grade municipal securities involves special
risks as compared with investment in higher grade municipal securities,
including potentially greater sensitivity to a general economic downturn,
greater market price volatility and less liquid secondary market trading. The
Fund may not be an appropriate investment for all investors. The net asset value
per share of the Fund can be expected to increase or decrease depending on real
or perceived changes in the credit risks associated with its portfolio
investments, changes in interest rates and other factors affecting the municipal
credit markets. See "Investment Objective and Policies," "Municipal Securities"
and "Appendix A."
INVESTMENT PRACTICES. In certain circumstances the Fund may enter into when-
issued or delayed delivery transactions and various strategic transactions,
which practices entail certain risks. See "Investment Practices."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should
5
<PAGE> 22
consider such factors together with the amount of sales charges and accumulated
distribution and services fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund. To
assist investors in making this determination, the table under the caption
"Annual Fund Operating Expenses and Example" sets forth examples of the charges
applicable to each class of shares.
The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."
Class A Shares. Class A Shares are subject to an initial sales charge equal to
4.75% of the public offering price (4.99% of the net amount invested), reduced
on investments of $100,000 or more. Class A Shares are subject to ongoing
distribution and services fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares
automatically convert to Class A Shares seven years after the end of the
calendar month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares. Class C Shares automatically convert to Class A Shares ten years
after the end of the calendar month in which the investor's order to purchase
was accepted.
6
<PAGE> 23
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDS Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. distributes the
Fund's shares.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
7
<PAGE> 24
- ------------------------------------------------------------------------------
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 percentage of the
offering price)................ 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price)......................... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of the
original purchase price or
redemption proceeds)........... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a percentage
of amount redeemed)............ None None None
Exchange fees.................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
8
<PAGE> 25
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- -------- --------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets).......................... 0.48% 0.48% 0.48%
12b-1 Fees(1) (as a percentage of average
daily net assets).......................... 0.23% 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets).......................... 0.24% 0.22% 0.21%
Total Expenses (as a percentage of average
daily net assets).......................... 0.95% 1.70% 1.69%
</TABLE>
- ------------------------------------------------------------------------------
(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
9
<PAGE> 26
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an operating
expense ratio of 0.95% for Class A Shares,
1.70% for Class B Shares, and 1.69% for Class
C Shares, (ii) 5% annual return and (iii)
redemption at the end of each time period:
Class A Shares............................... $57 $76 $ 98 $ 159
Class B Shares............................... $57 $89 $ 107 $ 172*
Class C Shares............................... $27 $53 $ 92 $ 200
You would pay the following expenses on the
same $1,000 investment assuming no redemption
at the end of each period:
Class A Shares............................... $57 $76 $ 98 $ 159
Class B Shares............................... $17 $54 $ 92 $ 172*
Class C Shares............................... $17 $53 $ 92 $ 200
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after seven 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. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion to
Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Purchase of Shares," "Redemption of Shares,"
"Investment Advisory Services" and "The Distribution and Service Plans."
10
<PAGE> 27
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout each of
the periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1995 31, 1994 31, 1993 31, 1992 31, 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................................... $13.848 $ 15.629 $14.529 $15.687 $15.632
-------- -------- -------- -------- --------
Net Investment Income..................................................... 1.024 .956 1.052 1.064 1.173
Net Realized and Unrealized Gain/Loss on Investments...................... 1.072 (1.717) 1.158 (1.047 ) .097
-------- -------- -------- -------- --------
Total from Investment Operations........................................... 2.096 (.761) 2.210 .017 1.27
-------- -------- -------- -------- --------
Less Distributions from and in Excess of Net Investment Income(1).......... 0.960 1.020 1.110 1.175 1.215
-------- -------- -------- -------- --------
Net Asset Value, End of the Period......................................... $14.984 $ 13.848 $15.629 $14.529 $15.687
========= ========== ========= ========= =========
Total Return(2)............................................................ 15.52% (4.93%) 15.82% 0.08% 8.51%
Net Assets at End of Period (in millions).................................. $ 665.8 $ 603.0 $ 636.2 $ 566.1 $ 626.7
Ratio of Expenses to Average Net Assets.................................... 0.95% .87% 1.03% 1.08% 1.09%
Ratio of Net Investment Income to Average Net Assets....................... 7.05% 6.48% 6.95% 7.07% 7.54%
Portfolio Turnover......................................................... 58.76% 101.11% 90.82% 44.48% 65.39%
<CAPTION>
CLASS A SHARES
------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1990 31, 1989 31, 1988 31, 1987 31, 1986
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period................................... $16.378 $16.183 $15.874 $16.769 $15.004
-------- -------- -------- -------- --------
Net Investment Income..................................................... 1.269 1.306 1.311 1.307 1.316
Net Realized and Unrealized Gain/Loss on Investments...................... (.755 ) .205 .319 (.908 ) 1.796
-------- -------- -------- -------- --------
Total from Investment Operations........................................... .514 1.511 1.630 .399 3.112
-------- -------- -------- -------- --------
Less Distributions from and in Excess of Net Investment Income(1).......... 1.260 1.316 1.321 1.294 1.347
-------- -------- -------- -------- --------
Net Asset Value, End of the Period......................................... $15.632 $16.378 $16.183 $15.874 $16.769
========= ========= ========= ========= =========
Total Return(2)............................................................ 3.23% 9.71% 10.66% 2.87% 21.59%
Net Assets at End of Period (in millions).................................. $ 630.3 $ 623.0 $ 453.6 $ 336.8 $ 230.1
Ratio of Expenses to Average Net Assets.................................... 1.04% .90% .84% .74% .67%
Ratio of Net Investment Income to Average Net Assets....................... 7.95% 8.02% 8.16% 8.06% 7.96%
Portfolio Turnover......................................................... 97.37% 66.32% 79.24% 85.30% 31.74%
</TABLE>
(Continued on following page)
(1) Distributions in excess of net investment income result from temporary
differences inherent in the recognition of interest income and capital gains
under generally accepted accounting principles and for federal income tax
purposes.
(2) Total Return does not reflect the effect of sales charges.
See Financial Statements and Notes Thereto
11
<PAGE> 28
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C SHARES
CLASS B SHARES -----------------------------------
----------------------------------- AUGUST 13,
MAY 1, 1993 1993
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR YEAR DISTRIBUTION) YEAR YEAR DISTRIBUTION)
ENDED ENDED TO ENDED ENDED TO
DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER DECEMBER
31, 1995 31, 1994 31, 1993 31, 1995 31, 1994 31, 1993
-------- -------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................. $13.850 $ 15.621 $14.670 $13.846 $ 15.610 $15.030
-------- -------- ------------- -------- -------- -------------
Net Investment Income............................... 0.908 .841 .656 0.910 .824 .369
Net Realized and Unrealized Gain/Loss on
Investments....................................... 1.071 (1.718) .945 1.077 (1.694) .580
-------- -------- ------------- -------- -------- -------------
Total from Investment Operations...................... 1.979 (.877) 1.601 1.987 (.870) .949
-------- -------- ------------- -------- -------- -------------
Less Distributions from and in Excess of Net
Investment Income(1)................................ 0.846 .894 .650 0.846 .894 .369
-------- -------- ------------- -------- -------- -------------
Net Asset Value, End of the Period.................... $14.983 $ 13.850 $15.621 $14.987 $ 13.846 $15.610
======= ======= ============ ======= ======= ============
Total Return(2)....................................... 14.62% (5.69%) 11.12%* 14.70% (5.62%) 6.37%*
Net Assets at End of Period (in millions)............. $ 137.9 $ 112.4 $ 56.6 $ 9.5 $ 7.6 $ 5.2
Ratio of Expenses to Average Net Assets............... 1.70% 1.64% 1.74% 1.69% 1.64% 1.82%
Ratio of Net Investment Income to Average Net
Assets.............................................. 6.25% 5.70% 5.95% 6.19% 5.71% 5.21%
Portfolio Turnover.................................... 58.76% 101.11% 90.82% 58.76% 101.11% 90.82%
</TABLE>
- ---------------
(1) Distributions in excess of net investment income result from temporary
differences inherent in the recognition of interest income and capital gains
under generally accepted accounting principles and for federal income tax
purposes.
(2) Total Return does not reflect the effect of sales charges.
* Non-Annualized.
See Financial Statements and Notes Thereto
12
<PAGE> 29
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Tax Free High Income Fund ("Fund") is a separate
diversified series of Van Kampen American Capital Tax Free Trust (the "Trust"),
which is an open-end management investment company, commonly known as a "mutual
fund," organized as a Delaware business trust. Mutual funds sell their shares to
investors and invest the proceeds in a portfolio of securities. A mutual fund
allows investors to pool their money with that of other investors in order to
obtain professional investment management. Mutual funds generally make it
possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to provide investors with a high level
of current income exempt from federal income taxes primarily through investment
in a diversified portfolio of medium and lower grade municipal securities. The
Fund may invest in medium and lower grade municipal securities rated, at the
time of investment, between BBB and B- (inclusive) by Standard & Poor's Ratings
Group ("S&P"), Baa and B3 (inclusive) by Moody's Investors Service, Inc.
("Moody's"), comparably rated short-term municipal obligations and municipal
securities determined by the Adviser to be of comparable quality. There is no
assurance that the Fund will achieve its investment objective. 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.
The Fund generally invests its assets in municipal securities, the interest on
which, in the opinion of bond counsel or other counsel to the issuer of such
securities, is exempt from federal income tax. See "Municipal Securities." In
normal circumstances, up to 100%, but not less than 80%, of the Fund's net
assets will be invested in such municipal securities. The foregoing is a
fundamental policy and cannot be changed without shareholder approval. Any
"private activity" obligations in which the Fund may invest will not be treated
as municipal securities for purposes of the 80% test. The Fund also may invest
up to 10% of its assets in tax-exempt money market funds that invest in
securities rated comparably to those
13
<PAGE> 30
in which the Fund may invest. Such instruments will be treated as municipal
securities for purposes of the 80% test.
Medium grade municipal securities are those rated BBB by S&P or Baa by
Moody's, comparably rated short-term municipal obligations and municipal
securities determined by the Adviser to be of comparable quality. Municipal
securities rated BBB by S&P generally are regarded by S&P as having an adequate
capacity to pay interest and repay principal; adverse economic conditions or
changing circumstances are, however, more likely in S&P's view to lead to a
weakened capacity to pay interest and repay principal as compared with higher
rated municipal securities. Municipal securities rated Baa by Moody's generally
are considered by Moody's as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. In Moody's view, 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. In Moody's view, such securities lack outstanding investment
characteristics and have speculative characteristics as well.
The Fund may invest in lower grade municipal securities rated, at the time of
investment, either not lower than B- by S&P or not lower than B3 by Moody's, in
comparably rated short-term municipal obligations and in municipal securities
determined by the Adviser to be of comparable quality. Municipal securities
rated B by S&P generally are regarded by S&P, on balance, as predominantly
speculative with respect to capacity to pay interest or repay principal in
accordance with the terms of the obligation. While such securities will likely
have some quality and protective characteristics, in S&P's view these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
Securities rated B by Moody's are viewed by Moody's as generally lacking
characteristics of the desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small.
The Fund will not make initial investments in municipal securities rated, at
the time of investment, below B- by S&P and below B3 by Moody's, in comparably
rated short-term municipal obligations or in municipal securities determined by
the Adviser to be of comparable quality. The Fund may retain municipal
securities which are downgraded after investment. There is no minimum rating
with respect to municipal securities which may be retained in the Fund's
portfolio, and the Fund may thus hold securities that are in default or with
respect to which payment of interest and/or repayment of principal is in
arrears. A complete description of the various S&P and Moody's rating categories
is included as Appendix A to this Prospectus.
Investment in medium and lower grade securities involves special risks as
compared with investment in higher grade securities, including potentially
greater sensitivity to a general economic downturn, greater market price
volatility and less liquid secondary market trading. See "Municipal
Securities--Special Considerations
14
<PAGE> 31
and Risk Factors Regarding Medium and Lower Grade Municipal Securities." There
can be no assurance that the Fund will achieve its investment objective, and the
Fund may not be an appropriate investment for all investors. Furthermore,
interest on certain "private activity" obligations in which the Fund may invest
is treated as a preference item for the purpose of calculating the alternative
minimum tax and, accordingly, a portion of the income produced by the Fund may
be taxable under the alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund. See "Tax Status."
At times the Adviser may judge that conditions in the markets for medium and
lower grade municipal securities make pursuing the Fund's basic investment
strategy of investing primarily in such municipal securities inconsistent with
the best interests of shareholders. At such times, the Fund may invest all or a
portion of its assets in higher grade municipal securities and in municipal
securities determined by the Adviser to be of comparable quality. Although such
higher grade municipal securities generally entail less credit risk, such higher
grade municipal securities may have a lower yield than medium and lower grade
municipal securities and investment in such higher grade municipal securities
may result in a lower yield to Fund shareholders. The Adviser may also judge
that conditions in the markets for long- and intermediate-term municipal
securities in general make pursuing the Fund's basic investment strategy
inconsistent with the best interests of the Fund's shareholders. At such times,
the Fund may pursue strategies primarily designed to reduce fluctuations in the
value of the Fund's assets, including investing the Fund's assets in
high-quality, short-term municipal securities and in high-quality, short-term
taxable securities. See "Tax Status."
The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1995 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings
15
<PAGE> 32
of all municipal securities held by the Fund during the 1995 fiscal year,
computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
--------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
- -------------------------------------- ------------------- ---------------------
<S> <C> <C>
AAA/Aaa............................... 28.57% 0.88%
AA/Aa................................. 4.44% 0.00%
A/A................................... 7.58% 0.20%
BBB/Baa............................... 18.79% 14.04%
BB/Ba................................. 2.83% 12.09%
B/B................................... 1.19% 5.50%
CCC/Caa............................... 0.00% 3.25%
CC/Ca................................. 0.00% 0.00%
C/C................................... 0.00% 0.00%
D..................................... 0.00% 0.64%
------- -------
Percentage of Rated and Unrated
Securities.......................... 63.40% 36.60%
============== ================
</TABLE>
Securities rated D are in default, and payment of interest and/or repayment of
principal is in arrears. Securities that are in default or with respect to which
payment of interest and/or repayment of principal is in arrears present special
risk considerations. The Fund may incur additional expenses to the extent that
it is required to seek recovery of interest or principal, and the Fund may be
unable to obtain full recovery thereof. See "Municipal Securities--Special
Considerations and Risk Factors Regarding Medium and Lower Grade Municipal
Securities."
The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during periods of relative instability in the market for
medium and lower grade securities. The percentage of the Fund's assets invested
in securities of various grades may from time to time vary substantially from
those set forth above.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Municipal securities in which the Fund may invest are debt
obligations issued by or on behalf of the governments of states, territories or
possessions of the United States, the District of Columbia and their political
subdivisions, agencies and instrumentalities, certain interstate agencies and
certain territories of the United States, the interest on which, in the opinion
of bond counsel or other counsel to the issuer of such securities, is exempt
from federal income tax.
16
<PAGE> 33
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Fund may engage. Variable
rate securities bear rates of interest that are adjusted periodically according
to formulae intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. The Fund
will not invest more than 15% of its total assets in derivative municipal
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest, or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Such securities may also pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of securities whose rates vary inversely
with market rates of interest generally will be larger than comparable changes
in the value of an equal principal amount of a fixed rate municipal security
having similar credit quality, redemption provisions and maturity. Municipal
notes include tax, revenue and bond anticipation notes of short maturity,
generally less than three years, which are issued to obtain temporary funds for
various public purposes. Municipal leases are obligations issued by state and
local governments or authorities to finance the acquisition of equipment and
facilities. Certain municipal lease obligations may include "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Some municipal securities may not be backed by the
faith, credit and taxing power of the issuer. Certain of the municipal
securities in which the Fund may invest represent relatively recent innovations
in the municipal securities markets. While markets for such recent innovations
progress through stages of development, such markets may be less developed than
more fully developed markets for municipal securities. A more detailed
description of the types of
17
<PAGE> 34
municipal securities in which the Fund may invest is included in the Statement
of Additional Information.
The net asset value of each of the Funds will change with changes in the value
of their respective portfolio securities. Because the Funds will invest
primarily in fixed income municipal securities, the net asset value of each of
the Funds can be expected to change as general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested in
fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax-exempt interest dividends might be adversely affected.
SPECIAL CONSIDERATIONS AND RISK FACTORS REGARDING MEDIUM AND LOWER GRADE
MUNICIPAL SECURITIES. The Fund invests in medium and lower grade municipal
securities. Municipal securities which are in the medium and lower grade
categories generally offer a higher current yield than is offered by higher
grade municipal securities, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuer's ability to make timely payment of interest and principal when due.
Market risk relates to the changes in market value that occur as a result of
variation in the level of prevailing interest rates and yield relationships in
the municipal securities market. Debt securities rated BB or below by S&P and Ba
or below by Moody's are commonly referred to as "junk bonds." Although the Fund
primarily will invest in medium and lower grade municipal securities, the Fund
may invest in higher grade municipal securities for temporary defensive
purposes. Such investments may result in lower current income than if the Fund
were fully invested in medium and lower grade securities.
The value of the Fund's portfolio securities can be expected to fluctuate over
time. When interest rates decline, the value of a portfolio invested in fixed
income securities generally can be expected to rise. Conversely, when interest
rates rise, the value of a portfolio invested in fixed income securities
generally can be expected to decline. However, the secondary market prices of
medium and lower grade municipal securities are less sensitive to changes in
interest rates and are more sensitive to adverse economic changes or individual
issuer developments than are the secondary market prices of higher grade debt
securities. A significant increase in interest rates or a general economic
downturn could severely disrupt the market for medium and lower grade municipal
securities and adversely affect the market value of such securities. Such events
also could lead to a higher incidence of defaults by issuers of medium and lower
grade municipal securities as compared with historical default rates. In
addition, changes in interest rates and periods of economic uncertainty can be
expected to result in increased volatility in the market price of the municipal
securities in the Fund's portfolio and thus in the net asset value of the
18
<PAGE> 35
Fund. Also, adverse publicity and investor perceptions, whether or not based on
rational analysis, may affect the value and liquidity of medium and lower grade
municipal securities. The secondary market value of municipal securities
structured as zero coupon securities and payment-in-kind securities may be more
volatile in response to changes in interest rates than debt securities which pay
interest periodically in cash. Investment in such securities also involves
certain tax considerations. See "Tax Status."
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium and lower grade municipal securities to pay
interest and to repay principal, to meet projected financial goals and to obtain
additional financing. 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 assets with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Further, the Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of interest
or the repayment of principal on its portfolio holdings, and the Fund may be
unable to obtain full recovery thereof.
To the extent that there is no established retail market for some of the
medium or lower grade municipal securities in which the Fund may invest, trading
in such securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for medium and lower grade
municipal securities held in the Fund's portfolio, the ability of the Adviser to
value the Fund's securities becomes more difficult and the Adviser's use of
judgment may play a greater role in the valuation of the Fund's securities due
to the reduced availability of reliable objective data. The effects of adverse
publicity and investor perceptions may be more pronounced for securities for
which no established retail market exists as compared with the effects on
securities for which such a market does exist. Further, the Fund may have more
difficulty selling such securities in a timely manner and at their stated value
than would be the case for securities for which an established retail market
does exist.
The Adviser seeks to minimize the risks involved in investing in medium and
lower grade municipal securities through portfolio diversification, careful
investment analysis, and attention to current developments and trends in the
economy and financial and credit markets. The Fund will rely on the Adviser's
judgment, analysis and experience in evaluating the creditworthiness of an
issue. In its analysis, 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. As described under "Investment Advisory Services," the
Adviser will utilize at its own expense credit analysis and research services
provided by its affiliate, McCarthy, Crisanti &
19
<PAGE> 36
Maffei, Inc. ("MCM"). The Adviser may consider the credit ratings of Moody's
and S&P in evaluating municipal securities, although it does not rely primarily
on these ratings. 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 municipal securities held in the Fund's portfolio.
Municipal securities generally are not listed for trading on any national
securities exchange, and many issuers of medium and lower grade municipal
securities choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. The amount of information
available about the financial condition of an issuer of unlisted or unrated
securities generally is not as extensive as that which is available with respect
to issuers of listed or rated securities. Because of the nature of medium and
lower rated municipal securities, achievement by the Fund of its investment
objective may be more dependent on the credit analysis of the Adviser than is
the case for an investment company which invests primarily in exchange listed,
higher grade securities.
SPECIAL CONSIDERATIONS REGARDING CERTAIN MUNICIPAL SECURITIES. The Fund may
invest in zero coupon and payment-in-kind municipal securities. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
security and the perceived credit quality of the issuer. The Internal Revenue
Code of 1986, as amended (the "Code"), requires that regulated investment
companies distribute at least 90% of their net investment income each year,
including tax-exempt and non-cash income. Accordingly, although the Fund will
receive no coupon payments on zero coupon securities prior to their maturity,
the Fund is required, in order to maintain its desired tax treatment, to include
in its distributions to shareholders in each year any income attributable to
zero coupon securities that is in excess of 10% of the Fund's net investment
income in that year. The Fund may be required to borrow or to liquidate
portfolio securities at a time that it otherwise would not have done so in order
to make such distributions. Payment-in-kind securities are securities that pay
interest through the issuance of additional securities. Such securities
generally are more volatile in response to changes in interest rates and are
more speculative investments than are securities that pay interest periodically
in cash. As of December 31, 1995, approximately 7.12% and 0.04% of the Fund's
total net assets were invested in zero coupon securities and payment-in-kind
securities, respectively.
The Fund may invest in derivative municipal income securities such as inverse
floaters, range floaters and capped floaters. Investment in such securities
involves special risks as compared to investment in conventional floating or
variable rate
20
<PAGE> 37
municipal income securities. The extent of increases and decreases in the value
of such securities and the corresponding changes to the per share net asset
value of the Fund in response to changes in market rates of interest generally
will be larger than comparable changes in the value of an equal principal amount
of a fixed rate income security having similar credit quality, redemption
provisions and maturity. The markets for such securities may be less developed
than the markets for conventional floating or variable rate municipal income
securities.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risk. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Fund's investment policy with respect
thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values,
21
<PAGE> 38
limit the amount of appreciation the Fund can realize on its investments or
cause the Fund to hold a security it might otherwise sell. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of the Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Fund's position. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, the Fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. The
Strategic Transactions that the Fund may use and some of their risks are
described more fully in the Fund's Statement of Additional Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will be distributed to its shareholders in taxable distributions.
See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund relies on the buyer or seller, as the
case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. No specific limitation exists as to the percentage
of the Fund's assets which may be used to acquire securities on a "when issued"
or "delayed delivery" basis. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the
22
<PAGE> 39
purpose of acquiring securities for the Fund's portfolio consistent with its
investment objective and policies and not for the purpose of investment
leverage.
OTHER PRACTICES. The Fund has no restrictions on the maturity of municipal
bonds in which it may invest. The Fund will seek to invest in municipal bonds of
such maturities that, in the judgment of the Fund and the Adviser, will provide
a high level of current income consistent with liquidity requirements and market
conditions.
The Fund may borrow amounts up to 5% of its net assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its net assets to
secure such borrowings.
It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market, such as Hospital Revenue Bonds,
Housing Agency Bonds, Airport Bonds or Industrial Development Bonds. In such
circumstances, economic, business, political or other changes affecting one bond
might also affect other bonds in the same segment, thereby potentially
increasing market risk with respect to the bonds in such segment. Such changes
could include, but are not limited to, proposed or suggested legislation
involving the financing of projects within such segments, declining markets or
needs for such projects and shortages or price increases of materials needed for
such projects.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. In effecting purchases and
sales of the Fund's portfolio securities, the Adviser and the Fund may place
orders with and pay brokerage commissions to brokers, including brokers which
may be affiliated with the Fund, the Adviser, the Distributor or dealers
participating in the offering of the Fund's shares. In addition, in selecting
among firms to handle a particular transaction, the Adviser and the Fund may
take into account whether the firm has sold or is selling shares of the Fund.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc., the distributor of the Fund and sponsor of the funds
mentioned above, is a wholly-owned subsidiary of Van Kampen American Capital.
23
<PAGE> 40
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 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.
ADVISORY AGREEMENT. The business and affairs of the Fund are managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the officers of the
Fund will supervise and implement the Fund's investment activities and will be
responsible for overall management of the Fund's business affairs. The Fund will
pay the Adviser a fee equal to a percentage of the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------------------------------------- -------------
<S> <C>
First $500 million.................................... 0.50 of 1.00%
Over $500 million..................................... 0.45 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies. The Adviser reserves the right in
its sole discretion from time-to-time to waive all or a portion of its
management fee or to reimburse the Fund for all or a portion of its other
expenses.
24
<PAGE> 41
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
circumstances, preclearance of trades.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice-President of the Adviser
has been primarily responsible for the day-to-day management of the Fund's
portfolio since April 1989. Mr. Johnson has been employed by the Adviser since
April 1989.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares,
25
<PAGE> 42
each with no front-end sales charge but subject to a CDSC and a higher aggregate
distribution and service fee. However, because initial sales charges are
deducted at the time of purchase of Class A Share accounts under $1 million, a
purchaser of such Class A Shares would not have all of his or her funds invested
initially and, therefore, would initially own fewer shares than if Class B
Shares or Class C Shares had been purchased. On the other hand, an investor
whose purchase would not qualify for price discounts applicable to Class A
Shares and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his or her funds
initially invested in Class B Shares or Class C Shares. If such an investor
anticipates that he or she will redeem such shares prior to the expiration of
the CDSC period applicable to Class B Shares, the investor may wish to acquire
Class C Shares. Investors must weigh the benefits of deferring the sales charge
and having all of their funds invested against the higher aggregate distribution
and service fee applicable to Class B Shares and Class C Shares (discussed
below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Generally, a class of shares subject
to a higher ongoing distribution and service fee or subject to the conversion
feature will have a higher expense ratio and pay lower dividends than a class of
shares subject to a lower ongoing distribution and service fee or not subject to
the conversion feature. The per share net asset values of the different classes
of shares are expected to be substantially the same; from time to time, however,
the per share net asset values of the classes may differ. The net asset value
per share of each class of shares of the Fund will be determined as described in
this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares
26
<PAGE> 43
will be limited to the extent necessary to preserve the Fund's qualification as
a regulated investment company under the Code.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares for sale to the public on a continuous
basis through Van Kampen American Capital Distributors, Inc., (the
"Distributor"), as principal underwriter, which is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered through members
of the National Association of Securities Dealers, Inc. ("NASD") acting as
securities dealers ("dealers") and through NASD members acting as brokers for
investors ("brokers") or eligible non-NASD members acting as agents for
investors ("financial intermediaries"). The Fund reserves the right to suspend
or terminate the continuous public offering of its shares at any time and
without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediary for certain services
or activities which are primarily intended to result in sales of shares of the
Fund. Fees may include payment for travel
27
<PAGE> 44
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature. Such
fees paid for such services and activities with respect to the Fund will not
exceed in the aggregate 1.25% of the average total daily net assets of the Fund
on an annual basis. In addition, the Distributor may provide additional
compensation to Edward D. Jones & Co. or an affiliate thereof based on a
combination of its sales of shares and increases in assets under management.
Such payments to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets of the Fund. These programs will not
change the price an investor will pay for shares or the amount that the Fund
will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive more than 90% or more
of the sales charge may be deemed to be "underwriters" as that term is defined
in the Securities Act of the 1933, as amended.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000................ 4.75% 4.99% 4.25%
$100,000 but less than $250,000... 3.75 3.90 3.25
$250,000 but less than $500,000... 2.75 2.83 2.25
$500,000 but less than
$1,000,000...................... 2.00 2.04 1.75
$1,000,000 or more*............... * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to brokers, dealers or financial
intermediaries who initiate and are responsible for purchases of $1 million
or more as follows: 1.00% on sales to $2 million, plus 0.80% on the next
million, plus 0.20% on the next $2 million and 0.08% on the excess over $5
million. See "Purchase of Shares -- Deferred Sales Charge Alternatives" for
additional information with respect to contingent deferred sales charges.
28
<PAGE> 45
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating
29
<PAGE> 46
provision, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. If the goal is not achieved within the
13-month period, the investor must pay the difference between the charges
applicable to the purchases made and the charges previously paid. When an
investor signs a Letter of Intent, shares equal to at least 5% of the total
purchase amount of the level selected will be restricted from sale or redemption
by the investor until the Letter of Intent is satisfied or any additional sales
charges have been paid; if the Letter of Intent is not satisfied by the investor
and any additional sales charges are not paid, sufficient restricted shares will
be redeemed by the Fund to pay such charges. Additional information is contained
in the application accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement 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 other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
30
<PAGE> 47
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
31
<PAGE> 48
investments the Fund imposes a contingent deferred sales charge of 1.00% in
the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the
excess over $10 million.
(9) Participants in any 403(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:
1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect
32
<PAGE> 49
to Class C Shares. Such compensation will not change the price an investor will
pay for CDSC Shares or the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchase of CDSC Shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution fees facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value per share since
the time of purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption
33
<PAGE> 50
proceeds will be charged at a rate of 3.75% (the applicable rate in the second
year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C>
First................................................ 4.00%
Second............................................... 3.75%
Third................................................ 3.50%
Fourth............................................... 2.50%
Fifth................................................ 1.50%
Sixth................................................ 1.00%
Seventh and after.................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
CONVERSION FEATURE. Seven years and ten years after the end of the month in
which a shareholder's order to purchase a Class B Share or Class C Share,
respectively, was accepted, such share automatically will convert to a Class A
Share and no longer will be subject to the higher aggregate distribution and
service fees applicable to Class B Shares and Class C Shares. The purpose of the
conversion feature is to relieve the holders of Class B Shares and Class C
Shares that have been outstanding for a period of time sufficient for the
Distributor to have been compensated for distribution expenses related to such
shares from most of the burden of such distribution-related expenses. The Fund
does not expect to issue any share certificates upon conversion.
34
<PAGE> 51
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of the shares in the respective sub-account
also will convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemption of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund is determined by calculating the
total value of the Fund's assets, deducting its total liabilities, and dividing
the result by the number of shares of the Fund outstanding. The net asset value
is computed once daily as of 5:00 p.m. Eastern time, Monday through Friday,
except on customary business holidays, or except on any day on which no purchase
or redemption orders are received, or there is not a sufficient degree of
trading in the Fund's portfolio
35
<PAGE> 52
securities such that the Fund's net asset value per share might be materially
affected. The Fund reserves the right to calculate the net asset value and to
adjust the public offering price based thereon more frequently than once a day
if deemed desirable.
Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Trust, of which the
Fund is a separate series. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Other assets are valued at fair value as determined in good faith by or
under the direction of the Trustees. The net asset value per share of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset value of the different classes of
shares may differ.
- ------------------------------------------------------------------------------
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. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. 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
36
<PAGE> 53
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon
37
<PAGE> 54
receipt of prior approval of the Adviser. Under normal circumstances, it is the
policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request.
38
<PAGE> 55
The Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
39
<PAGE> 56
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or State Street Bank. Retirement plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the
40
<PAGE> 57
redemption request. In the event the redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, and the name and title
of the individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. The redemption price is the net asset value
per share next determined after the request is received by ACCESS in proper
form. Payment for shares redeemed (less any sales charge, if applicable) will
ordinarily be made by check mailed within three business days after acceptance
by ACCESS of the request and any other necessary documents in proper order. Such
payments may be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, ACCESS may delay mailing a redemption check until it confirms that the
purchase check has cleared, usually a period of up to 15 days. Any gain or loss
realized on the redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may
41
<PAGE> 58
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's other redemption procedures previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a
42
<PAGE> 59
total or partial redemption, but only to redemptions of shares held at the time
of the initial determination of disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers,
43
<PAGE> 60
dealers or financial intermediaries and in connection with the maintenance of
such shareholders' accounts. The Fund pays the Distributor the lesser of the
balance of the 0.25% not paid to such brokers, dealers or financial
intermediaries or the amount of the Distributor's actual distribution related
expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts
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<PAGE> 61
with respect to a particular CDSC Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such CDSC Share. In such circumstances, a shareholder of such CDSC
Share may be deemed to incur expenses attributable to other shareholders of such
class. As of December 31, 1995, there were $4,240,477 and $5,122 of unreimbursed
distribution expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.08% and 0.05% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all or a portion of the interest income, dividends, other ordinary
income earned by the Fund on its portfolio assets, less all expenses of the
Fund. Expenses of the Fund are accrued each day. Net realized long- and
short-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than
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<PAGE> 62
distributions with respect to a class of shares subject to a lower distribution
fee, service fee, or not subject to the conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL TAXES. The Fund has qualified and intends to continue to qualify as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets. If the Fund so qualifies and if it distributes to
its shareholders at least 90% of its net investment income (including tax-exempt
interest and other taxable income including net short-term capital gain, but not
net capital gains, which are the excess of net long-term capital gains over net
short-term capital losses), it will not be required to pay federal income taxes
on any income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income to satisfy the 90%
distribution requirement. The Fund will not be subject to federal income tax on
any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income
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<PAGE> 63
retained by, and taxed in the hands of, the Fund will be treated as having been
distributed.
If the Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of the Fund's
taxable year, at least 50% of the total of the Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), the Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from the
Fund.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of such Fund
have been held by such shareholders. Distributions in excess of the Fund's
earnings and profits, such as distributions of principal, will first reduce the
adjusted tax basis of the shares held by the shareholders and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholders (assuming such Shares are held as a capital asset). The Fund will
inform shareholders of the source and tax status of such distributions promptly
after the close of each calendar year. Distributions from the Fund will not be
eligible for the dividends received deduction for corporations.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in the Fund may cause shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
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<PAGE> 64
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held shares for more than one year. Any loss realized
on shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss to the
extent of any capital gains dividends received with respect to such shares.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirement for avoiding federal income taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid federal income taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold. Discount
relating to certain stripped tax-exempt obligations may constitute taxable
income when distributed to shareholders.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on
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<PAGE> 65
the December 31 of the year in which the dividend was declared. In addition,
certain other distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid by the Fund (except for purposes of
the 4% excise tax) during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the
distribution is actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their tax advisers
regarding the specific federal tax consequences of holding and disposing of
shares as well as the effects of state, local and foreign tax laws.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
The Fund's yield quotation is determined for each class of the Fund's shares
on a monthly basis with respect to the immediately preceding 30 day period.
Yield is computed by dividing the Fund's net investment income per share earned
during such 30 day period by the Fund's maximum offering price per share on the
last day of such period. Net investment income per share for a class of shares
is determined by taking the interest earned by the Fund during the period and
allocable to the class of shares, subtracting the expenses (net of any
reimbursement) accrued for the period and allocable to the class of shares, and
dividing the result by the product of (a) the average daily number of such class
of the Fund's shares outstanding during the period that were entitled to receive
dividends and (b) the Fund's maximum offering price per share on the last day of
the period. The yield calculation formula assumes net investment income is
earned and reinvested at a constant rate and annualized at the end of a six
month period.
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<PAGE> 66
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 for each class of the Fund's shares 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 for each class of the
Fund's shares by determining the redemption value at the end of specified
periods (after adding back all dividends and other distributions made during the
period) of a $1,000 investment in a class of shares of the Fund (less the
maximum sales charge) at the beginning of the period, annualizing the increase
or decrease over the specified period with respect to such initial investment
and expressing the result as a percentage.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
the Fund from a given date to a subsequent given date. Cumulative
non-standardized total return is calculated by measuring the value of an initial
investment in the Fund at a given time, deducting the maximum sales charge of
4.75%, determining the value of all subsequent reinvested distributions, and
dividing the net change in the value of the investment as of the end of the
period by the amount of the initial investment and expressing the result as a
percentage.
From time to time the Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for the
Fund. Distribution rate is a measure of the level of income and short-term
capital gain dividends, if any, distributed for a specified period. Distribution
rate is determined by annualizing the distributions per share for a stated
period and dividing the result by the public offering price for the same period.
It differs from yield, which is a measure of the income actually earned by the
Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of, such investments during a stated period. Distribution rate
is, therefore, not intended to be a complete measure of the Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by the Fund. Distribution rates will be calculated separately for
each class of the Fund's shares.
From time to time the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
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<PAGE> 67
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, the Fund may utilize sales literature that
includes hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
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DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a separate series of the Van Kampen American Capital Tax Free
Trust, a Delaware business trust organized as of May 10, 1995 (the "Trust"). The
Fund was originally organized in 1985 under the name Van Kampen Merritt Tax Free
High Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
on July 31, 1995. Shares of the Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
individual series.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of share is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares and Class C Shares into
Class A Shares as described above. In the event of liquidation, each of the
shares of the Fund is entitled to its portion of all of the Fund's net assets
after all debt and expenses of the Fund have been paid. Since Class B Shares and
Class C Shares pay higher distribution expenses, the liquidation proceeds to
holders of Class B Shares and Class C Shares are likely to be lower than to
holders of Class A Shares.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
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ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital Tax
Free High Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
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APPENDIX A
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.
</TABLE>
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<TABLE>
<S> <C>
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,
B on balance, as predominantly speculative with respect to
CCC capacity to pay interest and repay principal. 'BB'
CC indicates the least degree of speculation and 'C' the
C highest. While such debt will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to
default than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could
lead to inadequate capacity to meet timely interest and
principal payments. The 'BB' rating category is also
used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB' rating.
B Debt rated 'B' has a greater vulnerability to default
but currently has the capacity to meet interest payments
and principal repayments. Adverse business, financial,
or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'BB'
or 'BB-' rating.
CCC Debt rated 'CCC' has a currently identifiable
vulnerability to default, and is dependent upon
favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial,
or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC'
rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied 'B' or
'B-' rating.
CC The rating 'CC' typically is applied to debt
subordinated to senior debt that is assigned an actual
or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated
to senior debt which is assigned an actual or implied
'CCC-' debt rating. The 'C' rating may be used to cover
a situation where a bankruptcy petition has been filed,
but debt service payments are continued.
</TABLE>
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<TABLE>
<S> <C>
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due even if the
applicable grace period has not expired, unless S&P
believes that such payments will be made during such
grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments
are jeopardized.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major categories.
<TABLE>
<S> <C>
C The letter 'c' indicates that the holder's option to
tender the security for purchase may be canceled under
certain prestated conditions enumerated in the tender
option documents.
L The letter 'L' indicates that the rating pertains to the
principal amount of these 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 judgment with
respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement or
closing documentation confirming investments and cash
flows.
NR Indicates that no public rating has been requested, that
there is insufficient information on which to base a
rating, or that S&P does not rate a particular type of
obligation as a matter of policy.
</TABLE>
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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 be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues
determined to possess very strong characteristics are a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest,
with some vulnerability to adverse financial and
economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood
of timely payment of debt having an original maturity of no more than 365
days. Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of
safety regarding timely payment is strong. Those issues
determined to possess extremely strong safety
characteristics are denoted with a plus sign (+)
designation.
</TABLE>
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<PAGE> 73
<TABLE>
<S> <C>
A-2 Capacity for timely payment on issues with this
designation is satisfactory. However, the relative
degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable
to the adverse effects of changes in circumstances than
obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations
with a doubtful capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P
believes that such payments will be made during such
grace period.
A commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information
furnished to S&P by the issuer or obtained from other sources it
considers reliable. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of, such
information.
</TABLE>
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating symbols
are used for bonds to denote the long-term maturity and the commercial paper
rating symbols for the put option (for example, 'AAA/A-1+'). With short-term
demand debt, S&P's note rating symbols are used with the commercial paper
rating symbols (for example, 'SP-1+/A-1+').
57
<PAGE> 74
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.
</TABLE>
58
<PAGE> 75
<TABLE>
<S> <C>
CAA Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present
elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
CON (..) Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are
rated conditionally and designed 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>
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the
quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or
companies that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonable up-to-date data to permit a judgment to be
formed; if a bond is called for redemption; or for other reasons.
59
<PAGE> 76
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 bonds 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.
60
<PAGE> 77
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
61
<PAGE> 78
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
TAX FREE HIGH INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Tax Free High Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Tax Free High Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 79
------------------------------------------------------------------------------
TAX FREE HIGH
INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 80
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
- --------------------------------------------------------------------------------
INVESTORS SHOULD REFER TO THE SECTION OF THE PROSPECTUS ENTITLED "INSURANCE"
FOR A DISCUSSION OF THE NATURE AND LIMITATIONS OF THE INSURANCE APPLICABLE TO
MUNICIPAL SECURITIES HELD IN THE FUND'S PORTFOLIO.
Van Kampen American Capital Insured Tax Free Income Fund (the "Insured
Fund") is a separate diversified mutual fund, organized as a series of Van
Kampen American Capital Tax Free Trust. The Insured Fund's investment objective
is to provide investors with a high level of current income exempt from federal
income taxes, with liquidity and safety of principal, primarily through
investment in a diversified portfolio of insured municipal securities. Insured
municipal securities in which the Insured Fund may invest include conventional
fixed-rate municipal securities, variable rate municipal securities and other
types of municipal securities described herein. See "Municipal Securities." All
of the municipal securities in the Insured Fund's portfolio will be insured by
AMBAC Indemnity Corporation or by other municipal bond insurers whose
claims-paying ability is rated "AAA" by Standard & Poor's Ratings Group on the
date of purchase.
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital California Insured Tax Free Fund (the
"California Insured Fund") is a separate diversified mutual fund, organized as a
series of Van Kampen American Capital Tax Free Trust. The California Insured
Fund's investment objective is to
(Continued on next page.)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
Statements of Additional Information, dated April 29, 1996, containing
additional information about the Funds have been filed with the Securities and
Exchange Commission and are hereby incorporated by reference in their entirety
into this Prospectus. A copy of either Fund's respective Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 81
(Continued from previous page.)
provide only California investors with a high level of current income exempt
from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. Insured municipal securities in which the
California Insured Fund may invest include conventional fixed-rate municipal
securities, variable rate municipal securities and other types of municipal
securities described herein. See "Municipal Securities." All of the municipal
securities in the California Insured Fund's portfolio will be insured by AMBAC
Indemnity Corporation or by other municipal bond insurers whose claims-paying
ability is rated "AAA" by Standard & Poor's Ratings Group on the date of
purchase.
Van Kampen American Capital Investment Advisory Corp. is the investment
adviser for both the Insured Fund and the California Insured Fund (each a "Fund"
or collectively the "Funds"). There is no assurance that the Funds will achieve
their respective investment objectives. This Prospectus sets forth certain
information about the Funds that a prospective investor should know before
investing in either of the Funds. Please read it carefully and retain it for
future reference. Each Fund's address is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, and each Fund's telephone number is (800) 421-5666.
2
<PAGE> 82
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses -- Insured Fund............... 7
Annual Fund Operating Expenses and Example -- Insured Fund..... 8
Shareholder Transaction Expenses -- California Insured Fund.... 10
Annual Fund Operating Expenses and Example -- California
Insured Fund................................................. 11
Financial Highlights -- Insured Fund........................... 13
Financial Highlights -- California Insured Fund................ 15
The Funds...................................................... 17
Investment Objectives and Policies............................. 17
Municipal Securities........................................... 18
Investment Practices........................................... 22
Insurance...................................................... 25
Investment Advisory Services................................... 25
Alternative Sales Arrangements................................. 27
Purchase of Shares............................................. 29
Shareholder Services........................................... 40
Redemption of Shares........................................... 44
The Distribution and Service Plans............................. 47
Distributions from the Funds................................... 49
Tax Status..................................................... 50
Fund Performance............................................... 54
Additional Information......................................... 56
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS OR BY THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
3
<PAGE> 83
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUNDS. Van Kampen American Capital Insured Tax Free Income Fund (the
"Insured Fund") and Van Kampen American Capital California Insured Tax Free Fund
(the "California Insured Fund") are each separate diversified series of Van
Kampen American Capital Tax Free Trust, an open-end, diversified management
investment company organized as a Delaware business trust (the "Trust"). See
"The Funds."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVES. The INSURED FUND'S investment objective is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities.
The CALIFORNIA INSURED FUND'S investment objective is to provide only
California investors with a high level of current income exempt from federal and
California income taxes, with liquidity and safety of principal, primarily
through investment in a diversified portfolio of insured California municipal
securities. THE CALIFORNIA INSURED FUND IS AVAILABLE ONLY TO CALIFORNIA
RESIDENTS. Distribution to corporations subject to the California franchise tax
will be included in such corporation's gross income for purposes of determining
the California franchise tax. In addition, corporations subject to the
California corporate income tax may, in certain circumstances, be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. See "Tax Status."
INVESTMENT POLICIES. Municipal securities in which the Insured Fund and
California Insured Fund (each a "Fund" or collectively the "Funds") may invest
include fixed and variable rate securities, municipal notes, municipal leases,
tax exempt commercial paper, custodial receipts, participation certificates and
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions (as defined herein) in
which the Funds may engage. Each Fund may invest up to 15% of its total assets
in derivative variable rate securities such as inverse floaters, whose rates
vary inversely with changes in market rates of interest or range or capped
floaters, whose rates are subject to periodic or lifetime caps. There is no
assurance that either Fund will achieve its investment objectives. The net asset
value per share of the Funds may increase or decrease depending on changes in
interest rates and other factors affecting the municipal credit markets. See
"Investment Objectives and Policies."
INVESTMENT PRACTICES. In certain circumstances the Funds may enter into when-
issued or delayed delivery transactions and various strategic transactions,
which entail certain risks. See "Municipal Securities" and "Investment
Practices."
4
<PAGE> 84
INSURANCE. Each municipal security in the portfolio of the respective Funds is
insured as to the timely payment of principal and interest under one or more
policies obtained by the issuer or purchased by such Fund. No representation is
made as to the ability of any insurer to perform its obligations. See
"Insurance."
INVESTMENT RESULTS. The investment results of the Funds are shown in the tables
under the captions "Financial Highlights -- Insured Fund" and "Financial
Highlights -- California Insured Fund."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the tables under the
captions "Annual Fund Operating Expenses and Example -- Insured Fund" and
"Annual Fund Operating Expenses and Example -- California Insured Fund," set
forth examples of the charges applicable to each class of shares.
Each Fund currently offer three classes of shares which may be purchased at a
price equal to their net asset value per share plus sales charges which, at the
election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."
Class A Shares. Class A Shares of the Insured Fund are subject to an initial
sales charge equal to 4.75% of the public offering price (4.99% of the net
amount invested), reduced on investments of $100,000 or more. Class A Shares of
the California Insured Fund are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
respective Fund's average daily net assets attributable to the Class A Shares.
Certain purchases of Class A Shares qualify for reduced or no initial sales
charges and may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased. Class B Shares of the Insured Fund are subject to a CDSC if redeemed
within six years of purchase, which charge is equal to 4.00% of the lesser of
the then current net asset value or the original purchase price of such shares
in the first year after purchase and is reduced each year thereafter. Class B
Shares of the California Insured Fund are subject to a CDSC if redeemed within
four years of purchase, which charge is equal to 3.00% of the lesser of the then
current net asset value or
5
<PAGE> 85
the original purchase price of such shares in the first year after purchase and
is reduced each year thereafter. Class B Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 1.00% of the
respective Fund's average daily net assets attributable to the Class B Shares.
Class B Shares of the Insured Fund automatically convert to Class A Shares of
the Insured Fund seven years after the end of the calendar month in which the
investor's order to purchase was accepted. Class B Shares of the California
Insured Fund automatically convert to Class A Shares of the California Insured
Fund six years after the end of the calendar month in which the investor's order
to purchase was accepted.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased. Class C Shares are subject to a CDSC equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on Class C
Shares redeemed during the first year after purchase. Class C Shares are subject
to ongoing distribution and service fees at an aggregate annual rate of up to
1.00% of the respective Fund's average daily net assets attributable to the
Class C Shares. Class C Shares of each Fund automatically convert to Class A
Shares of the respective Fund ten years after the end of the calendar month in
which the investor's order to purchase was accepted.
REDEMPTION. Class A Shares may be redeemed at net asset value without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary between the Funds and among
each class of CDSC Shares and with the length of time a redeeming shareholder
has owned such shares. CDSC Shares redeemed after the expiration of the CDSC
period applicable to the respective class of CDSC Shares will not be subject to
a deferred sales charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for each Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. distributes the
shares of each Fund.
DISTRIBUTIONS FROM THE FUNDS. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner and the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class. See "Distributions from the Funds."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 86
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as
percentage of the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares".
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
7
<PAGE> 87
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE -- INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)(1)........................ 0.51% 0.51% 0.51%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... 0.22%(3) 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets)........................... 0.19% 0.21% 0.21%
Total Expenses (as a percentage of average
daily net assets)(1)........................ 0.92% 1.72% 1.72%
</TABLE>
- ------------------------------------------------------------------------------
(1) The Board of Trustees of the Trust and the shareholders of the Insured Fund
approved a material change to the investment advisory agreement which
increased the investment advisory fees effective on August 1, 1995. The
management fee shown above reflects the fees that would have been incurred
had this change been in place for the full year. For the year ended December
31, 1995, actual Management Fees were 0.46% for each class of shares and
actual Total Expenses were (i) 0.88% with respect to Class A Shares, (ii)
1.67% with respect to Class B Shares and (iii) 1.67% with respect to Class C
Shares. See "Investment Advisory Services."
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Insured Fund as compensation for ongoing services rendered to
investors. With respect to each class of shares, amounts in excess of 0.25%,
if any, represent an asset based sales charge. The asset based sales charge
with respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' brokers, dealers or financial intermediaries as
sales compensation. As of June 30, 1995, the Board of Trustees of the Trust
reduced the 12b-1 and service fees for the Insured Fund's Class A Shares to
0.25%. See "The Distribution and Service Fees."
(3) The Insured Fund's distribution and service plans with respect to Class A
Shares provide that 12b-1 and service fees are charged only with respect to
Class A Shares of the Insured Fund sold after the implementation date of
such plans. Due to the incremental "phase-in" of such plans with respect to
Class A Shares, it is anticipated that 12b-1 and service fees attributable
to Class A Shares will increase in accordance with such plans to a maximum
aggregate amount of 0.25% of the net assets attributable to the Insured
Fund's Class A Shares. Accordingly, it is unlikely that future expenses will
remain consistent with those disclosed in the fee table. See "The
Distribution and Service Plans."
8
<PAGE> 88
EXAMPLE:
You would pay the following expenses on a $1,000 investment in the Insured
Fund, assuming (i) an operating expense ratio of 0.92% for Class A Shares, 1.72%
for Class B Shares and 1.72% for Class C Shares, (ii) a 5% annual return and
(iii) redemption at the end of each time period. Insured Fund does not charge a
fee for redemptions (other than any applicable contingent deferred sales
charge):
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 56 $75 $ 96 $ 155
Class B Shares.................... 57 89 108 172*
Class C Shares.................... 27 54 93 203
</TABLE>
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 56 $75 $ 96 $ 155
Class B Shares.................... 17 54 93 172*
Class C Shares.................... 17 54 93 203
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Insured Fund will bear
directly or indirectly. The "Example" reflects expenses based on the "Annual
Fund Operating Expenses" table as shown above carried out to future years. Due
to the incremental "phase-in" of the Insured Fund's 12b-1 plans and service
plans, it is anticipated that 12b-1 and service fees applicable to Insured Fund
will increase in accordance with such plans to a maximum amount of 0.25% of such
Fund's net assets. The ten year amount with respect to the Class B Shares of the
Insured Fund reflects the lower aggregate 12b-1 and service fees applicable to
such shares after conversion to Class A Shares. Class B Shares acquired through
the exchange privilege are subject to the deferred sales charge schedule
relating to the Class B Shares of the fund from which the purchase of Class B
Shares was originally made. Accordingly, future expenses as projected could be
higher than those determined in the above table if the investor's Class B Shares
were exchanged from a fund with a higher contingent deferred sales charge. THE
INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Purchase of Shares," "Redemption of Shares," "Investment Advisory
Services" and "The Distribution and Service Plans."
9
<PAGE> 89
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases (as
percentage of the
offering price).......... 3.25%(1) None None
Maximum sales charge
imposed on reinvested
dividends (as a
percentage of the
offering price).......... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................ None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.50% After--None
Year 3--2.00%
Year 4--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................ None None None
Exchange fees.............. None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $25,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
10
<PAGE> 90
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE -- CALIFORNIA
INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees(1) (as a percentage of average
daily net assets)............................ 0.48% 0.48% 0.48%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... 0.24% 1.00% 1.00%
Other Expenses(3) (as a percentage of average
daily net assets)........................... 0.32% 0.28% 0.27%
Total Expenses(1)(3) (as a percentage of
average daily net assets)................... 1.04% 1.76% 1.75%
</TABLE>
- ------------------------------------------------------------------------------
(1) For the year ended December 31, 1995, actual "Management Fees" were 0.33%
for each class of shares reflecting a waiver of $245,247 by the Adviser and
"Total Expenses" were (i) 0.89% with respect to Class A Shares, (ii) 1.61%
with respect to Class B Shares and (iii) 1.60% with respect to Class C
Shares. The "Management Fees" and "Total Expenses" shown above do not
reflect any waiver of fees by the Adviser as it is anticipated that this
waiver will not be continued.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the California Insured Fund as compensation for ongoing services
rendered to investors. With respect to each class of shares, amounts in
excess of 0.25%, if any, represent an asset based sales charge. The asset
based sales charge with respect to Class C Shares includes 0.75% (as a
percentage of net asset value) paid to investors' broker, dealers or
financial intermediaries as sales compensation. As of June 30, 1995, the
Board of Trustees of the Trust reduced the 12b-1 and service fees for the
California Insured Fund's Class A Shares to 0.25%. See "The Distribution and
Service Plans."
(3) A portion of "Other Expenses" were reimbursed by the Adviser during the
Fund's fiscal year. Absent the Adviser's reimbursement, "Other Expenses"
would have been 0.33% for Class A Shares, 0.29% for Class B Shares and 0.28%
for Class C Shares and "Total Expenses" would have been 1.05% for Class A
Shares, 1.77% for Class B Shares and 1.76% for Class C Shares.
11
<PAGE> 91
EXAMPLES:
You would pay the following expenses on a $1,000 investment in the California
Insured Fund, assuming (i) an operating expense ratio of 1.04% for Class A
Shares, 1.76% for Class B Shares and 1.75% for Class C Shares, (ii) a 5% annual
return and (iii) redemption at the end of each time period. California Insured
Fund does not charge a fee for redemptions (other than any applicable contingent
deferred sales charge):
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 43 $65 $ 88 $ 155
Class B Shares.................... 48 75 95 171*
Class C Shares.................... 28 55 95 206
</TABLE>
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 43 $65 $ 88 $ 155
Class B Shares.................... 18 55 95 171*
Class C Shares.................... 18 55 95 206
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the California Insured Fund
will bear directly or indirectly. The "Example" reflects expenses based on the
"Annual Fund Operating Expenses" table as shown above carried out to future
years. Additionally, as the California Insured Fund's assets increase, the fees
waived or expenses reimbursed by the Adviser are expected to decrease.
Accordingly, it is unlikely that future expenses as projected will remain
consistent with those determined based on the table of the "Annual Fund
Operating Expenses." The ten year amount with respect to the Class B Shares of
the California Insured Fund reflects the lower aggregate 12b-1 and service fees
applicable to such shares after conversion to Class A Shares. Class B Shares
acquired through the exchange privilege are subject to the deferred sales charge
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made. Accordingly, future expenses as projected
could be higher than those determined in the above table if the investor's Class
B Shares were exchanged from a fund with a higher contingent deferred sales
charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Purchase of Shares," "Redemption of Shares," "Investment Advisory
Services" and "The Distribution and Service Plans."
12
<PAGE> 92
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSURED FUND (for a share outstanding throughout the
periods)
- --------------------------------------------------------------------------------
The following financial highlights for one Class A Share, one Class B Share
and one Class C Share of the Insured Fund outstanding throughout each of the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their reports thereon appear in Insured Fund's related Statement
of Additional Information. This information should be read in conjunction with
the financial statements and related notes thereto included in the related
Statements of Additional Information.
<TABLE>
<CAPTION>
INSURED FUND -- CLASS A SHARES
------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................................. $ 17.572 $ 19.587 $ 18.721 $18.478 $17.825 $17.798
-------- -------- -------- ------- ------- -------
Net Investment Income................................................ 1.021 1.051 1.107 1.146 1.153 1.160
Net Realized and Unrealized Gain/Loss on Investments................. 1.982 (2.280) 1.145 .561 .681 .037
-------- -------- -------- ------- ------- -------
Total from Investment Operations...................................... 3.003 (1.229) 2.252 1.707 1.834 1.197
-------- -------- -------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment Income............ 1.026 1.056 1.116 1.140 1.160 1.170
Distributions from Net Realized Gain on Investments.................. -0- -0- -0- .324 .021 -0-
-------- -------- -------- ------- ------- -------
Total Distributions................................................... 1.026 1.056 1.116 1.464 1.181 1.170
-------- -------- -------- ------- ------- -------
Net Asset Value, End of Period........................................ $ 19.549 $ 17.572 $ 19.857 $18.721 $18.478 $17.825
======== ======== ======== ======== ======== ========
Total Return(1)....................................................... 17.49% (6.31%) 12.32% 9.51% 10.62% 7.07%
Net Assets, End of Period (in millions)............................... $1,365.4 $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7
Ratio of Expenses to Average Net Assets (Annualized).................. .88% .88% .84% .83% .88% .87%
Ratio of Net Investment Income to Average Net Assets (Annualized)..... 5.44% 5.70% 5.69% 6.14% 6.39% 6.63%
Portfolio Turnover.................................................... 70.12% 48.46% 78.73% 111.90% 113.25% 107.79%
<CAPTION>
1989 1988 1987 1986
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................................. $17.394 $16.700 $17.945 $16.189
------- ------- ------- -------
Net Investment Income................................................ 1.182 1.184 1.198 1.249
Net Realized and Unrealized Gain/Loss on Investments................. .391 .682 (1.226) 1.846
------- ------- ------- -------
Total from Investment Operations...................................... 1.573 1.866 (.028) 3.095
------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment Income............ 1.169 1.172 1.215 1.231
Distributions from Net Realized Gain on Investments.................. -0- -0- .002 .108
------- ------- ------- -------
Total Distributions................................................... 1.169 1.172 1.217 1.339
------- ------- ------- -------
Net Asset Value, End of Period........................................ $17.798 $17.394 $16.700 $17.945
======== ======== ======== ========
Total Return(1)....................................................... 9.37% 11.48% .27% 19.73%
Net Assets, End of Period (in millions)............................... $ 634.0 $ 555.3 $ 502.5 $ 418.1
Ratio of Expenses to Average Net Assets (Annualized).................. .88% .85% .71% .76%
Ratio of Net Investment Income to Average Net Assets (Annualized)..... 6.73% 6.92% 7.04% 7.07%
Portfolio Turnover.................................................... 81.28% 132.85% 119.89% 31.00%
</TABLE>
(1) Total Return does not reflect the affect of sales charges.
(Table continued on following page)
See Financial Statements and Notes Thereto
13
<PAGE> 93
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSURED FUND
-------------------------------------------
CLASS B SHARES
-------------------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR YEAR DISTRIBUTION)
ENDED ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 17.563 $ 19.824 $19.320
------ ------ ------
Net Investment Income......................................................... .870 .899 .619
Net Realized and Unrealized Gain/Loss on Investments.......................... 1.978 (2.276) .513
------ ------ ------
Total from Investment Operations............................................... 2.868 (1.377) 1.132
------ ------ ------
Less Distributions from and in Excess of Net Investment Income................. .882 .884 .628
Net Asset Value, End of the Period............................................. $ 19.549 $ 17.563 $19.824
======== ======== =========
Total Return(1)................................................................ 16.67% (7.03%) 5.92%(2)
Net Assets at End of Period (in millions)...................................... $ 75.3 $ 30.0 $ 20.8
Ratio of Expenses to Average Net Assets (Annualized)........................... 1.67% 1.71% 1.68%
Ratio of Net Investment Income to Average Net Assets (Annualized).............. 4.69% 4.88% 4.25%
Portfolio Turnover............................................................. 70.12% 48.46% 78.73%
<CAPTION>
CLASS C SHARES
-------------------------------------------
AUGUST 13,
1993
(COMMENCEMENT OF
YEAR YEAR DISTRIBUTION)
ENDED ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------ ------------ -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period........................................... $ 17.568 $ 19.823 $19.650
------ ------ ------
Net Investment Income......................................................... .883 .908 .350
Net Realized and Unrealized Gain/Loss on Investments.......................... 1.979 (2.279) .181
------ ------ ------
Total from Investment Operations............................................... 2.862 (1.371) .531
------ ------ ------
Less Distributions from and in Excess of Net Investment Income................. .882 .884 .358
Net Asset Value, End of the Period............................................. $ 19.548 $ 17.568 $19.823
======== ======== =======
Total Return(1)................................................................ 16.60% (6.98%) 2.70%(2)
Net Assets at End of Period (in millions)...................................... $ 5.1 $ 3.5 $ 5.0
Ratio of Expenses to Average Net Assets (Annualized)........................... 1.67% 1.70% 1.68%
Ratio of Net Investment Income to Average Net Assets (Annualized).............. 4.68% 4.89% 4.21%
Portfolio Turnover............................................................. 70.12% 48.46% 78.73%
</TABLE>
- ---------------
(1) Total Return does not reflect the effect of sales charges.
(2) Non-Annualized.
See Financial Statements and Notes Thereto
14
<PAGE> 94
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CALIFORNIA INSURED FUND (for a share outstanding
throughout the periods)
- --------------------------------------------------------------------------------
The following financial highlights for one Class A Share, one Class B Share and
one Class C Share of the California Insured Fund outstanding throughout each of
the periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their reports thereon appear in California Insured Fund's related
Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the related Statements of Additional Information.
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $15.802 $18.286 $16.858 $16.259 $15.730 $15.607
------- ------- ------- ------- ------- -------
Net Investment Income.......................... .884 .912 .967 1.004 .990 .990
Net Realized and Unrealized Gain/Loss on
Investments.................................. 1.938 (2.484) 1.441 .585 .529 .123
------- ------- ------- ------- ------- -------
Total from Investment Operations................ 2.822 (1.572) 2.408 1.589 1.519 1.113
Less Distributions from and in Excess of Net
Investment Income.............................. .888 .912 .980 .990 .990 .990
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period.................. $17.736 $15.802 $18.286 $16.858 $16.259 $15.730
======== ======== ======== ======== ======== ========
Total Return(1)(2).............................. 18.28% (8.75%) 14.54% 10.08% 9.98% 7.44%
Net Assets at End of Period (in millions)....... $ 147.6 $ 130.3 $ 151.1 $ 74.2 $ 60.2 $ 50.6
Ratio of Expenses to Average Net Assets(1)
(Annualized)................................... .89% .78% .69% .69% .55% .69%
Ratio of Net Investment Income to Average Net
Assets(1) (Annualized)......................... 5.23% 5.46% 5.37% 6.07% 6.20% 6.42%
Portfolio Turnover.............................. 42.40% 56.38% 36.17% 60.70% 69.85% 34.03%
<CAPTION>
1989 1988 1987 1986
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............ $15.227 $14.719 $16.274 $14.464
------- ------- ------- -------
Net Investment Income.......................... .988 .981 1.041 1.034
Net Realized and Unrealized Gain/Loss on
Investments.................................. .381 .519 (1.566) 1.832
------- ------- ------- -------
Total from Investment Operations................ 1.369 1.500 (.525) 2.866
Less Distributions from and in Excess of Net
Investment Income.............................. .989 .992 1.030 1.056
------- ------- ------- -------
Net Asset Value, End of Period.................. $15.607 $15.227 $14.719 $16.274
======== ======== ======== ========
Total Return(1)(2).............................. 9.22% 10.51% (2.72%) 20.01%
Net Assets at End of Period (in millions)....... $ 46.6 $ 37.3 $ 31.5 $ 12.9
Ratio of Expenses to Average Net Assets(1)
(Annualized)................................... .75% .65% .14% .16%
Ratio of Net Investment Income to Average Net
Assets(1) (Annualized)......................... 6.38% 6.53% 7.02% 6.05%
Portfolio Turnover.............................. 32.18% 100.50% 68.82% 21.45%
</TABLE>
- ----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets
(Annualized)................................... 1.05% 1.08% 1.01% 1.08% 1.04% 1.06%
Ratio of net investment income to average net
assets (Annualized)............................ 5.07% 5.16% 5.05% 5.68% 5.71% 6.05%
Ratio of expenses to average net assets
(Annualized).................................... 1.10% 1.11% .97% 2.98%
Ratio of net investment income to average net
assets (Annualized)............................ 6.04% 6.08% 6.19% 3.23%
</TABLE>
- ----------------
(2) Total Return does not reflect the effect of sales charges.
(Table continued on following page)
See Financial Statements and Notes Thereto
15
<PAGE> 95
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND
------------------------------------------------
CLASS B SHARES
------------------------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR ENDED DISTRIBUTION)
DECEMBER 31, TO
----------------------------- DECEMBER 31,
1995 1994 1993
------------ ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................................ $ 15.805 $ 18.266 $ 17.570
------ ------ ------
Net Investment Income.............................................. .766 .785 .549
Net Realized and Unrealized Gain/Loss on Investments............... 1.926 (2.482) .705
------ ------ ------
Total from Investment Operations.................................... 2.692 (1.697) 1.254
Less Distributions from and in Excess of Net Investment Income...... .761 .764 .558
------ ------ ------
Net Asset Value, End of Period...................................... $ 17.736 $ 15.805 $ 18.266
======== ======== ========
Total Return(1)(2).................................................. 17.33% (9.39%) 7.25%(3)
Net Assets at End of Period (in millions)........................... $ 24.6 $ 17.1 $ 15.3
Ratio of Expenses to Average Net Assets(1) (Annualized)............. 1.61% 1.52% 1.45%
Ratio of Net Investment Income to Average Net Assets(1)
(Annualized)....................................................... 4.51% 4.71% 4.06%
Portfolio Turnover.................................................. 42.40% 56.38% 36.17%
<CAPTION>
CLASS C SHARES
------------------------------------------------
AUGUST 13,
1993
(COMMENCEMENT OF
YEAR ENDED DISTRIBUTION)
DECEMBER 31, TO
----------------------------- DECEMBER 31,
1995 1994 1993
------------ ------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................................ $ 15.798 $ 18.257 $ 18.010
------ ------ ------
Net Investment Income.............................................. .758 .773 .307
Net Realized and Unrealized Gain/Loss on Investments............... 1.941 (2.486) .258
------ ------ ------
Total from Investment Operations.................................... 2.699 (1.695) .565
Less Distributions from and in Excess of Net Investment Income...... .761 .764 .318
------ ------ ------
Net Asset Value, End of Period...................................... $ 17.736 $ 15.798 $ 18.257
======== ======== ========
Total Return(1)(2).................................................. 17.40% (9.40%) 3.17%(3)
Net Assets at End of Period (in millions)........................... $ 1.80 $ 2.8 $ 4.0
Ratio of Expenses to Average Net Assets(1) (Annualized)............. 1.60% 1.51% 1.45%
Ratio of Net Investment Income to Average Net Assets(1)
(Annualized)....................................................... 4.50% 4.71% 3.82%
Portfolio Turnover.................................................. 42.40% 56.38% 36.17%
</TABLE>
- ----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net assets (Annualized)................ 1.77% 1.82% 1.77%
Ratio of net investment income to average net assets (Annualized)... 4.35% 4.41% 3.74%
Ratio of expenses to average net assets (Annualized)................ 1.75% 1.82% 1.76%
Ratio of net investment income to average net assets (Annualized)... 4.34% 4.39% 3.52%
</TABLE>
(2) Total Return does not reflect the effect of sales charges
(3) Non-Annualized
See Financial Statements and Notes Thereto
16
<PAGE> 96
- ------------------------------------------------------------------------------
THE FUNDS
- ------------------------------------------------------------------------------
Van Kampen American Capital Insured Tax Free Income Fund (the "Insured Fund")
and Van Kampen American Capital California Insured Tax Free Fund (the
"California Insured Fund") are each separate diversified series of the Van
Kampen American Capital Tax Free Trust (the "Trust"), an open-end management
investment company, commonly known as a "mutual fund," which is organized as a
Delaware business trust.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Insured Fund and
California Insured Fund (each a "Fund" and collectively the "Funds"). The
Adviser and its affiliates also manage other mutual funds distributed by Van
Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
INSURED FUND. The investment objective of the Insured Fund is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the Insured Fund's portfolio, except for investments in tax exempt
money market funds as noted below, will be insured as to timely payment of both
principal and interest. However, there are market risks inherent in all
investments in securities; accordingly there can be no assurance that the
Insured Fund will achieve its objective.
The Insured Fund will generally invest all of its assets in municipal
securities, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax. See
"Municipal Securities." From time to time the Insured Fund temporarily may also
invest up to 10% of its assets in tax exempt money market funds. Such
instruments will be treated as investments in municipal securities.
CALIFORNIA INSURED FUND. The investment objective of the California Insured
Fund is to provide only California investors with a high level of current income
exempt from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. All of the municipal securities in the
California Insured Fund's portfolio, except for investments in tax exempt money
funds as noted below, will be insured as to timely payment of both principal and
interest. However, there are market risks inherent in all investments in
securities; and accordingly there can be no assurance that the California
Insured Fund will achieve its objective. THE CALIFORNIA INSURED FUND IS
AVAILABLE ONLY TO RESIDENTS OF CALIFORNIA.
17
<PAGE> 97
The California Insured Fund will generally invest all of its assets in
California municipal securities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal and California income tax. Distribution to corporations subject to the
California franchise tax will be included in such corporation's gross income for
purposes of determining the California franchise tax. In addition, corporations
subject to the California corporate income tax may, in certain circumstances, be
subject to such taxes with respect to distributions from the California Insured
Fund. Accordingly, an investment in shares of the California Insured Fund may
not be appropriate for corporations subject to either tax. See "Municipal
Securities" and "Tax Status." From time to time the California Insured Fund
temporarily may also invest up to 10% of its assets in California tax exempt
money market funds. Such instruments will be treated as investments in municipal
securities.
Investments in the Funds may not be appropriate for all investors. The Funds
are not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Funds. Investments in the Funds are
intended to be long-term investments and should not be used as trading vehicles.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of each of the
Fund's assets will be invested in such municipal securities. The foregoing is a
fundamental policy of each of the Funds and cannot be changed without approval
of the shareholders of the respective Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements
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<PAGE> 98
of, or are similar in effect to, certain Strategic Transactions (as defined
below) in which the Funds may engage. Variable rate securities bear rates of
interest that are adjusted periodically according to formulae intended to
reflect market rates of interest and include securities whose rates vary
inversely with changes in market rates of interest. Neither Fund will invest
more than 15% of its total assets in derivative municipal securities such as
inverse floaters, whose rates vary inversely with changes in market rates of
interest, or range floaters or capped floaters whose rates are subject to
periodic or lifetime caps. Such securities may also pay a rate of interest
determined by applying a multiple to the variable rate. The extent of increases
and decreases in the value of securities whose rates vary inversely with market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Some municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract or a conditional
sales contract. Some municipal securities may not be backed by the faith, credit
and taxing power of the issuer. Certain of the municipal securities in which the
Funds may invest represent relatively recent innovations in the municipal
securities markets. While markets for such recent innovations progress through
stages of development, such markets may be less developed than more fully
developed markets for municipal securities. A more detailed description of the
types of municipal securities in which the Funds may invest is included in each
Fund's Statement of Additional Information.
The net asset value of each of the Funds will change with changes in the value
of their respective portfolio securities. Because the Funds will invest
primarily in fixed income municipal securities, the net asset value of each of
the Funds can be expected to change as general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested in
fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal
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<PAGE> 99
securities. If such a proposal were enacted, the ability of the Funds to pay tax
exempt interest dividends might be adversely affected.
INSURED MUNICIPAL SECURITIES. With respect to its investments in municipal
securities, each of the Insured Fund and the California Insured Fund may invest
only in municipal securities insured under one of the insurance policies meeting
the standards described in this Prospectus. See "Insurance." Although each
insurer's quality standards may vary from time to time, such insurers generally
insure only those municipal securities that are rated at the date of purchase
(1) in the case of long-term debt, in the four highest ratings by Standard &
Poor's Ratings Group (S&P) (AAA, AA, A and BBB) or by Moody's Investors Service,
Inc. (Moody's) (Aaa, Aa, A and Baa); (2) in the case of short-term notes, SP-1+
through SP-2 by S&P or MIG 1 through MIG 4 by Moody's; or (3) in the case of
tax-exempt commercial paper, A-1+ through A-2 by S&P or Prime-1 through Prime-2
by Moody's. Such ratings are relative and subjective and are not absolute
standards of quality. Any insurer may also insure, and each of the Insured Fund
and California Insured Fund may invest in, unrated municipal securities of
similar quality, as determined by the Adviser, if such securities meet the
insurance standards of such insurer. The Insured Fund and California Insured
Fund may invest, without limitation as to rating category, in any securities for
which such Funds obtain insurance coverage. For a description of such ratings
see the respective Fund's Statement of Additional Information incorporated by
reference into this Prospectus.
SPECIAL CONSIDERATIONS REGARDING CALIFORNIA MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of California municipal securities. With respect to an investment in
the Fund, through popular initiative and legislative activity, the ability of
the State of California (the "State") and its local governments to raise money
through property taxes and to increase spending has been the subject of
considerable debate and change in recent years. Various State Constitutional
amendments, for example, have been adopted which have the effect of limiting
property tax and spending increases, while legislation has sometimes added to
these limitations and has at other times sought to reduce their impact. To date,
these Constitutional, legislative and budget developments do not appear to have
severely decreased the ability of the State and local governments to pay
principal and interest on their obligations. It can be expected that similar
types of State legislation or Constitutional proposals will continue to be
introduced. The impact of future developments in these areas is unclear.
From 1990 until 1994, the State experienced the worst economic, fiscal and
budget conditions since the 1930's. The recession seriously affected State tax
revenues and caused increased expenditures for health and welfare programs. As a
result, the State faced several budget imbalances and used up many of its
available cash resources. Accordingly, rating agencies have reduced the State's
credit ratings several times during recent years.
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<PAGE> 100
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
More detailed information concerning California municipal securities is
included in the California Insured Fund's Statement of Additional Information.
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for each
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the particular
investment policies of such Fund. As a result, the Funds will not necessarily
invest in the highest yielding tax-exempt municipal securities permitted by
their respective investment policies if the Adviser determines that market risks
or credit risks associated with such investments would subject a Fund's
portfolio to excessive risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. There is no limitation as to the maturity of municipal securities
in which a Fund may invest. The Adviser may adjust the average maturity of a
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. Other than for tax purposes, frequency of
portfolio turnover will generally not be a limiting factor if any of the Funds
considers it advantageous to purchase or sell securities. The Funds may have
annual portfolio turnover rates in excess of 100%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
respective Fund and its shareholders. High portfolio turnover may also result in
the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status."
DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing a Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of such Fund's assets. In
implementing these "defensive" strategies, a Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
such Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase
21
<PAGE> 101
agreements with respect to any of the foregoing investments; or any other fixed-
income securities that the Adviser considers consistent with such strategy.
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INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Funds also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Funds' 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The Funds may purchase and sell derivative
instruments such as exchange-listed and over-the-counter put and call options on
securities, financial futures, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and enter into
various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets, to protect such Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of such Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to a
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation such Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a Fund creates the possibility that losses on the hedging instrument
may be greater than gains in the value of such Fund's position. In addition,
futures and
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<PAGE> 102
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts and
options thereon should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time they tend to limit any potential
gain which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that a Fund may use and some of
their risks are described more fully in the respective Fund's Statement of
Additional Information.
Income earned or deemed to be earned, if any, by a Fund from its Strategic
Transactions will be distributed to its shareholders in taxable distributions.
See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Funds may also
purchase and sell municipal securities on a "when issued" and "delayed delivery"
basis. No income accrues to the Funds on municipal securities in connection with
such purchase transactions prior to the date the Funds actually take delivery of
such securities. These transactions are subject to market fluctuation; the value
of the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Funds rely on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Funds missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Funds are the
buyer in such a transaction, however, they will maintain, in a segregated
account with their custodian, cash or high-grade municipal portfolio securities
having an aggregate value equal to the amount of such purchase commitments until
payment is made. The Funds will make commitments to purchase municipal
securities on such basis only with the intention of actually acquiring these
securities, but the Funds may sell such securities prior to the settlement date
if such sale is considered to be advisable. No specific limitation exists as to
the percentage of each Fund's assets which may be used to acquire securities on
a "when issued" or "delayed delivery" basis. To the extent a Fund engages in
"when issued" and "delayed delivery" transactions, they will do so for the
purpose of acquiring securities for the respective Fund's portfolio consistent
with such Fund's respective investment objectives and policies and not for the
purposes of investment leverage. No specific limitation exists as to the
percentage of a Fund's assets which may be used to acquire securities on a "when
issued" or "delayed delivery" basis.
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<PAGE> 103
OTHER PRACTICES. The Funds have no restrictions on the maturity of municipal
bonds in which they may invest. Each Fund will seek to invest in municipal bonds
of such maturities that, in the judgment of such Fund and the Adviser, will
provide a high level of current income consistent with liquidity requirements
and market conditions.
The Funds may borrow amounts up to 5% of their respective net assets in order
to pay for redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of their respective net
assets to secure such borrowings.
A Fund generally will not invest more than 25% of its total assets in any
industry, nor will a Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that a Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Advisor determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Insured Fund reserves the right to invest more than 25% of its
assets in industrial development bonds or in issuers located in the same state,
although it has no present intention to invest more than 25% of its assets in
issuers located in the same state. If the Insured Fund were to invest more than
25% of its assets in issuers located in the same state, it would be more
susceptible to adverse economic, business, or regulatory conditions in that
state. The California Insured Fund invests primarily in a diversified portfolio
of insured California municipal securities.
ALLOCATION OF BROKERAGE TRANSACTIONS. In effecting purchases and sales of the
Funds' portfolio securities, the Adviser and the Funds may place orders with and
pay brokerage commissions to brokers, including brokers which may be affiliated
with the Funds, the Adviser and the Distributor or dealers participating in the
offering of the Funds' shares. In addition, in selecting among firms to handle a
particular transaction, the Adviser and the Funds may take into account whether
the firm has sold or is selling shares of the Funds.
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<PAGE> 104
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INSURANCE
- ------------------------------------------------------------------------------
All of the municipal securities in the portfolios of the Insured Fund and the
California Insured Fund will be insured by municipal bond insurers whose claims-
paying ability is rated "AAA" by S&P on the date of purchase. Timely payment of
all principal and interest of each municipal security in the portfolios of the
Insured Fund and the California Insured Fund either will be pre-insured under a
policy obtained for such securities prior to the purchase of the securities by
such Funds or will be insured under policies obtained by such Funds to cover
otherwise uninsured securities. With respect to municipal securities that are
not pre-insured, the Insured Fund and the California Insured Fund have each
obtained a mutual fund portfolio insurance policy from AMBAC Indemnity
Corporation ("AMBAC") whose claims-paying ability is rated "AAA" by S&P. The
Insured Fund and the California Insured Fund may obtain portfolio insurance from
other insurers in the future. No representation is made as to any insurer's
ability to meet its commitments.
Each insurance policy guarantees the timely payment of all principal and
interest on the municipal securities. Each policy provides, in general, that in
the event of nonpayment of interest or principal, when due, in respect of an
insured municipal security, the insurer is obligated to make such payment not
later than 30 days after it has been notified by the respective Fund that such
nonpayment has occurred (but not earlier than the date when such payment is
due). For these purposes, a payment of principal is due only at scheduled
maturity, including required sinking fund payments and mandatory redemptions, of
the security and not at any earlier time. The insurance does not guarantee the
market value of the municipal securities or the value of the shares of the
Funds.
More detailed information concerning such insurance policies, and concerning
AMBAC, is included in the respective Fund's Statement of Additional Information.
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Funds. The Adviser is a
wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen
American Capital"). Van Kampen American Capital is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and more than $50
billion under management or supervision. Van Kampen American Capital's more than
40 open-end and 38 closed-end funds and more than 2,800 unit investment trusts
are professionally distributed by leading financial advisers nationwide. Van
Kampen American Capital Distributors, Inc., the distributor of the Funds and
sponsor of the funds mentioned above, is 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
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<PAGE> 105
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 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.
ADVISORY AGREEMENT. The business and affairs of each of the Funds will be
managed under the direction of the Board of Trustees of the Trust, of which each
Fund is a separate series. Subject to their authority, the Adviser and the
respective officers of the Funds will supervise and implement the Funds'
investment activities and will be responsible for overall management of the
Funds' business affairs. Each Fund will pay the Adviser a fee equal to a
percentage of the average daily net assets of the respective Fund as follows:
<TABLE>
<CAPTION>
INSURED FUND CALIFORNIA FUND
- ----------------------------------- -----------------------------------
AVERAGE DAILY NET AVERAGE DAILY NET
ASSETS % PER ANNUM ASSETS % PER ANNUM
- ---------------------- ----------- ---------------------- -----------
<S> <C> <C> <C>
First $500 million.... 0.525% First $100 million.... 0.500%
Next $500 million..... 0.500% Next $150 million..... 0.450%
Next $500 million..... 0.475% Next $250 million..... 0.425%
Over $1,500 million... 0.450% Over $500 million..... 0.400%
</TABLE>
Under its investment advisory agreement with the Adviser, each Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor, or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by such Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares under the federal
securities laws, miscellaneous expenses and all taxes and fees to federal, state
or other governmental agencies. The Adviser reserves the right in its sole
discretion from time-to-time to waive all or a portion of its management fee or
to reimburse a Fund for all or a portion of its other expenses.
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<PAGE> 106
PERSONAL INVESTING POLICIES. The Funds and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between each Fund and
the Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, has
been primarily responsible for the day-to-day management of each Fund's
portfolio since May 1992. Mr. Piraro has been employed by the Adviser since May
1992. Prior to May 1992, Mr. Piraro was employed by First Chicago Capital
Markets.
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ALTERNATIVE SALES ARRANGEMENTS
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The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Funds, and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Funds.
Each Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares,
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<PAGE> 107
each with no front-end sales charge but subject to a CDSC and a higher aggregate
distribution and service fee. However, because initial sales charges are
deducted at the time of purchase of Class A Share accounts under $1 million, a
purchaser of such Class A Shares would not have all of his or her funds invested
initially and, therefore, would initially own fewer shares than if Class B
Shares or Class C Shares had been purchased. On the other hand, an investor
whose purchase would not qualify for price discounts applicable to Class A
Shares and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his or her funds
initially invested in Class B Shares or Class C Shares. If such an investor
anticipates that he or she will redeem such shares prior to the expiration of
the CDSC period applicable to Class B Shares, the investor may wish to acquire
Class C Shares. Investors must weigh the benefits of deferring the sales charge
and having all of their funds invested against the higher aggregate distribution
and service fee applicable to Class B Shares and Class C Shares (discussed
below).
Each class of shares represents an interest in the same portfolio of
investments of a Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the respective Fund's Rule 12b-1 distribution plan which relate only to such
class and (iii) has a different exchange privilege. Generally, a class of shares
subject to a higher ongoing distribution and service fee or subject to the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution and service fee or not
subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Funds will be
determined as described in this Prospectus under "Purchase of Shares -- Net
Asset Value."
The administrative expenses that may be allocated to a specific class of
shares will consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares
28
<PAGE> 108
will be limited to the extent necessary to preserve the respective Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
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PURCHASE OF SHARES
- ------------------------------------------------------------------------------
Shares of the Funds are continuously offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, which
is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are
also offered through members of the National Association of Securities Dealers,
Inc. ("NASD") acting as securities dealers ("dealers") and through NASD members
acting as brokers for investors ("brokers") or eligible non-NASD members acting
as agents for investors ("financial intermediaries"). Each of the Funds reserves
the right to suspend or terminate the continuous public offering of its shares
at any time and without prior notice.
The Funds' shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Funds' shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Funds generally will determine net asset value once
each business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Funds. Also, the Distributor in its discretion may from time to time, pursuant
to objective criteria established by it, pay fees to, and sponsor business
seminars for, qualifying brokers, dealers or financial intermediaries for
certain services or activities which are primarily in-
29
<PAGE> 109
tended to result in sales of shares of the Funds. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to a Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
such Fund on an annual basis. In addition, the Distributor may provide
additional compensation to Edward D. Jones & Co. or an affiliate thereof based
on a combination of its sales of shares and increases in assets under
management. Such payments to brokers, dealers and financial intermediaries for
sales contests, other sales programs and seminars are made by the Distributor
out of its own assets and not out of the assets of the Funds. These programs
will not change the price an investor will pay for shares or the amount that the
respective Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The tables below with
respect to the Funds show total sales charges and dealer concessions reallowed
to dealers and agency commissions paid to brokers with respect to sales of Class
A Shares. The sales charge is allocated between the investor's broker, dealer or
financial intermediary and the Distributor. As indicated previously, at the
discretion of the Distributor, the entire sales charge may be reallowed to such
broker, dealer or financial intermediary. The staff of the SEC has taken the
position that brokers, dealers and financial intermediaries who receive more
than 90% or more of the sales charge may be deemed to be "underwriters" as that
term is defined in the Securities Act of 1933, as amended.
30
<PAGE> 110
SALES CHARGE TABLES
INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000....... 3.75 3.90 3.25
$250,000 but less than $500,000....... 2.75 2.83 2.25
$500,000 but less than $1,000,000..... 2.00 2.04 1.75
$1,000,000 or more*................... * * *
</TABLE>
CALIFORNIA INSURED FUND
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
Less than $25,000..................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000........ 2.75 2.83 2.50
$250,000 but less than $500,000....... 1.75 1.78 1.50
$500,000 but less than $1,000,000..... 1.50 1.52 1.25
$1,000,000 or more*................... * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Funds imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to brokers, dealers or
financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to contingent
deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
31
<PAGE> 111
Investors, or their brokers, dealers or financial intermediaries, must notify
the respective Fund whenever a quantity discount is applicable to purchases.
Upon such notification, an investor will receive the lowest applicable sales
charge. Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
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 tables applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of a Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in Class A
Shares of a Fund with other shares of such Fund and shares of Participating
Funds plus the current offering price of all shares of such Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
tables. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of a Fund with other shares of such Fund
and shares of the Participating Funds plus the value of all shares of such Fund
and other Participating Funds previously purchased during such 13-month period
and still owned. An investor may elect to compute the 13-month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be
32
<PAGE> 112
restricted from sale or redemption by the investor until the Letter of Intent is
satisfied or any additional sales charges have been paid; if the Letter of
Intent is not satisfied by the investor and any additional sales charges are not
paid, sufficient restricted shares will be redeemed by the Fund to pay such
charges. Additional information is contained in the application accompanying
this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
respective Fund or the Distributor. The Funds reserve the right to modify or
terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. Each of the Funds permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A Shares of such Fund at net asset value with no minimum initial or
subsequent investment requirement if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by such Fund and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the broker, dealer or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their broker, dealer, financial intermediary
or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
respective Fund during each distribution period by all investors who choose to
invest in such Fund through the program and (2) provide such Fund's transfer
agent with appropriate backup data for each participating investor in a
computerized format fully compatible with the transfer agent's processing
system.
As further requirements for obtaining these special benefits, the respective
Fund also requires that all dividends and other distributions by such Fund be
reinvested in additional shares without any systematic withdrawal program. There
will be no minimum for reinvestments from unit investment trusts. The Fund will
send account activity statements to such participants on a monthly basis only,
even if their investments are made more frequently.
33
<PAGE> 113
NAV PURCHASE OPTIONS. Class A Shares of a Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by such Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of a Fund alone, or in any
combination of shares of such Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of a Fund with redemption proceeds from other
mutual fund complexes on which the investor has paid a front-end sales
charge or was subject to a deferred sales charge, whether or not paid, if
such redemption has occurred no more than 30 days prior to such purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the respective Fund imposes a contingent deferred sales charge
34
<PAGE> 114
of 1.00% in the event of redemptions within one year of the purchase
other than redemptions required to make payments to participants under
the terms of the plan. The contingent deferred sales charge incurred upon
certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on
sales to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the
excess over $10 million.
(9) Participants in any 403(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: 1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the respective Fund's transfer agent, the investment adviser,
trust company or bank trust department, provided that such Fund's transfer agent
receives federal funds for the purchase by the close of business on the next
business day following acceptance of the order. An authorized broker, dealer or
financial intermediary may charge a transaction fee for placing an order to
purchase shares pursuant to this provision or for placing a redemption order
with respect to such shares. The Funds may terminate, or amend the terms of,
offering shares of the Funds at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Funds may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the respective Fund, at a percentage rate of the dollar value of the
CDSC Shares purchased from such Fund by such brokers, dealers and financial
intermediaries, which percentage rate will be equal to (i) with respect to Class
A Shares, 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million; (ii) 4.00%
with respect to Class B Shares of the Insured Fund; (iii) 3.00% with respect to
Class B Shares of the California Insured Fund; and (iv) 1.00% with respect to
Class C Shares of each Fund. Such compensation
35
<PAGE> 115
will not change the price an investor will pay for CDSC Shares or the amount
that the respective Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchase of CDSC Shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the respective Fund in connection with the sale of shares of such
class of CDSC Shares, such as the payment of compensation to selected dealers
and agents for selling such shares. The combination of the contingent deferred
sales charge and the distribution fees facilitates the ability of the respective
Fund to sell such CDSC Shares without a sales charge being deducted at the time
of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value per share since
the time of purchase.
To provide an example, assume an investor purchased 100 Class B Shares of the
Insured Fund (as set forth below) at $10 per share (at a cost of $1,000) and in
the second year after purchase, the net asset value per share is $12 and, during
such time, the investor has acquired 10 additional Class B Shares upon dividend
reinvestment. If at such time the investor makes his first redemption of 50
shares (proceeds of $600), 10 shares will not be subject to charge because of
dividend reinvestment. With respect to the remaining 40 shares, the charge is
applied only to the original cost of $10 per share and not to the increase in
net asset value of $2 per
36
<PAGE> 116
share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate
of 3.75% (the applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the respective Fund may impose a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are responsible
for purchases of $1 million or more as follows: 1.00% on sales to $2 million,
plus 0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on
the excess over $5 million.
CLASS B SHARES. Class B Shares redeemed within the number of years of purchase
set forth below generally will be subject to a contingent deferred sales charge
at the rates set forth below, charged as a percentage of the dollar amount
subject thereto:
INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C>
First................................ 4.00%
Second............................... 3.75%
Third................................ 3.50%
Fourth............................... 2.50%
Fifth................................ 1.50%
Sixth................................ 1.00%
Seventh and after.................... 0.00%
</TABLE>
CALIFORNIA INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C>
First................................ 3.0%
Second............................... 2.5%
Third................................ 2.0%
Fourth............................... 1.0%
Fifth and after...................... 0.0%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares of each Fund redeemed within the first twelve
months of purchase generally will be subject to a contingent deferred sales
charge of
37
<PAGE> 117
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge.
CONVERSION FEATURE. Class B Shares and Class C Shares of the Insured Fund
automatically convert to Class A Shares of the Insured Fund seven years and ten
years, respectively, after the end of the month in which a shareholder's order
to purchase such shares was accepted and thereafter are subject to the lower
aggregate distribution and service fees applicable to Class A Shares of the
Insured Fund. Class B Shares and Class C Shares of the California Insured Fund
automatically convert to Class A Shares of the California Insured Fund six years
and ten years, respectively, after the end of the month in which a shareholder's
order to purchase such shares was accepted and thereafter are subject to the
lower aggregate distribution and service fees applicable to Class A Shares of
the California Insured Fund. The purpose of the conversion feature is to relieve
the holders of Class B Shares and Class C Shares that have been outstanding for
a period of time sufficient for the Distributor to have been compensated for
distribution expenses related to such shares from most of the burden of such
distribution-related expenses. The Funds do not expect to issue any share
certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of shares in the respective sub-account also
convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in a Fund's dividends
or distributions constituting "preferential dividends" under the Code and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
38
<PAGE> 118
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of each of the Funds is determined by
calculating the total value of such Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares of such Fund
outstanding. The net asset value is computed once daily as of 5:00 p.m. Eastern
time, Monday through Friday, except on customary business holidays, or except on
any day on which no purchase or redemption orders are received, or there is not
a sufficient degree of trading in such Fund's portfolio securities such that the
Fund's net asset value per share might be materially affected. Each of the Funds
reserves the right to calculate the net asset value and to adjust the public
offering price based thereon more frequently than once a day if deemed
desirable.
Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Trust, of which each
Fund is a separate series. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
in good faith by or under the direction of the Board of Trustees of the Trust to
be representative of the fair value at which it is expected such securities may
be resold. Other assets are valued at fair value as determined in good faith by
or under direction of the Trustees. The net asset values per share of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset value of the different classes of
shares may differ.
39
<PAGE> 119
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
Each of the Funds offers a number of shareholder services designed to
facilitate investment in its shares at little or no extra cost to the investor.
Below is a description of such services. Unless otherwise described below, each
of these services may be modified or terminated by the respective Fund at any
time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Funds and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Funds will not issue share certificates.
However, upon written or telephone request to the respective Fund, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of such Fund. A shareholder will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to Van Kampen American Capital Funds, c/o
ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an "affidavit of
loss" and to obtain a Surety Bond in a form acceptable to ACCESS. On the date
the letter is received ACCESS will calculate a fee for replacing the lost
certificate equal to no more than 2.00% of the net asset value of the issued
shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the respective Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 421-5666 ((800) 772-8889
for the hearing impaired) or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Distributions from the Funds."
40
<PAGE> 120
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the respective Fund. Additional
information is available from the Distributor or authorized brokers, dealers or
financial intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the respective Fund invested into shares of the same class of any
other Participating Fund, Tax Free Money Fund or Reserve Fund so long as a pre-
existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of a Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of a Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of a Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. Under normal circumstances, it is
the policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into a
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of a Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
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Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Funds employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the respective Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. VKAC and the respective
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. If the exchanging shareholder does
not have an account in the fund whose shares are being acquired, a new account
will be established with the same registration, dividend and capital gains
options (except dividend diversification options) and broker, dealer or
financial intermediary of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. Each of the Funds reserves the right to reject any order to
acquire its shares through exchange. In addition, each of the Funds may restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without
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incurring a contingent deferred sales charge. Initial account balance means the
amount of the shareholder's investment in the respective Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of a Fund are redeemed to provide the amount
of the periodic withdrawal payment. Dividends and capital gains distributions on
shares held under the plan are reinvested in additional shares at the next
determined net asset value. If periodic withdrawals continuously exceed
reinvested dividends and capital gains distributions, the shareholder's original
investment will be correspondingly reduced and ultimately exhausted. Withdrawals
made concurrently with purchases of additional shares ordinarily will be
disadvantageous to the shareholder because of the duplication of sales charges.
Each of the Funds reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Funds for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the respective Fund or State Street Bank. Retirement plans and accounts that are
subject to backup withholding are not eligible for the privilege. A "stop
payment" system is not available on these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
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available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
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Shareholders may redeem for cash some or all of their shares without charge by
the respective Fund (other than, with respect to CDSC Shares, the applicable
contingent deferred sales charge) at any time by sending a written request in
proper form directly to ACCESS, P. O. Box 418256, Kansas City, Missouri
64141-9256, by placing the redemption request through an authorized dealer or by
calling the respective Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase
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check has cleared, usually a period of up to 15 days. Any gain or loss realized
on the redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. Each of the Funds permits redemption of shares
by telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the respective Fund at (800)
421-5666 ((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Funds employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the
respective Fund will be liable for following instructions which it reasonably
believes to be genuine. VKAC and the respective Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available if the shareholder
cannot reach ACCESS by telephone, whether because all telephone lines are busy
or for any other reason; in such case, a shareholder would have to use the
respective Fund's other redemption procedures previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for all accounts other than retirement accounts. The
telephone redemption privilege is not available for shares represented by
certificates. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check or wiring redemption proceeds
until it confirms that the purchase check has cleared, usually a
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period of up to 15 days. If an account has multiple owners, ACCESS may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. Each of the Funds reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Funds will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Funds do not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The respective Fund may redeem any shareholder
account with a net asset value on the date of the notice of redemption less than
the minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
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REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the respective Fund may reinstate any portion or all of the
net proceeds of such redemption in Class A Shares of such Fund. Holders of Class
C Shares who have redeemed shares of the respective Fund may reinstate any
portion or all of the net proceeds of such redemption in Class C Shares of such
Fund with credit given for any contingent deferred sales charge paid upon such
redemption. Such reinstatement is made at the net asset value next determined
after the order is received, which must be within 120 days after the date of the
redemption. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge." Reinstatement at net asset value is also offered to participants in
those eligible retirement plans held or administered by Van Kampen American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
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THE DISTRIBUTION AND SERVICE PLANS
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Each of the Funds has adopted a distribution plan (the "Distribution Plan")
with respect to each class of its shares pursuant to Rule 12b-1 under the 1940
Act. Each of the Funds also has adopted a service plan (the "Service Plan") with
respect to each class of shares. The Distribution Plan and Service Plan of each
Fund provide that the respective Fund may spend a portion of such Fund's average
daily net assets attributable to each class of its shares in connection with the
distribution of respective class of shares and in connection with the provision
of ongoing services to shareholders of each class. Each Distribution Plan and
Service Plan is being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. Each of the Funds may spend an aggregate amount up to 0.25%
per year of the average daily net assets attributable to the Class A Shares of
the respective Fund pursuant to its Distribution Plan and Service Plan. From
such amount, the respective Fund may spend up to 0.25% per year of the average
daily net assets attributable to its Class A Shares pursuant to its Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. Each of the
Funds pays the Distributor the lesser of the balance of the 0.25% not paid to
such brokers, dealers or financial intermediaries or the amount of the
Distributor's actual distribution related expense.
CLASS B SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class B Shares of the respective
Fund pursuant to the Distribution Plan. In addition, each of the Funds may spend
up to 0.25% per year of such Fund's average daily net assets attributable to the
Class B Shares of the respective Fund pursuant to its Service Plan in connection
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with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class C Shares of the respective
Fund pursuant to the Distribution Plan. From such amount, each of the Funds, or
the Distributor as agent for the respective Fund, pays brokers, dealers or
financial intermediaries in connection with the distribution of the Class C
Shares up to 0.75% of the respective Fund's average daily net assets
attributable to Class C Shares maintained in such Fund more than one year by
such broker's, dealer's or financial intermediary's customers. Each of the Funds
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense. In addition, each of the Funds may spend up
to 0.25% per year of the average daily net assets attributable to the Class C
Shares of the respective Fund pursuant to its Service Plan in connection with
the ongoing provision of services to holders of such shares by the Distributor
and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the respective Fund (up to the
amount of the actual expenses incurred) in future years so long as such
Distribution Plan is in effect. Except as mandated by applicable law, the Funds
do not impose any limit with respect to the number of years into the future that
such unreimbursed expenses may be carried forward (on a fund level basis).
Because such expenses are accounted on a fund level basis, in periods of extreme
net asset value fluctuation such amounts with respect to a particular CDSC Share
may be greater or less than the amount of the initial commission (including
carrying cost) paid by the Distributor with respect to such CDSC Share. In such
circumstances, a shareholder of such CDSC Share may be deemed to incur expenses
attributable to other shareholders of such class. As of December 31, 1995, there
were $1,071,702 and $299 of unreimbursed distribution expenses with respect to
Class B Shares and Class C Shares, respectively of the Insured Fund,
representing 1.43% and less than 0.01% of the Insured Fund's net assets
attributable to Class B Shares and Class C
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Shares, respectively. As of December 31, 1995, there were $450,844 and $27 of
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares, respectively of the California Insured Fund, representing 1.84% and less
than 0.01% of the California Insured Fund's net assets attributable to Class B
Shares and Class C Shares, respectively. If the Distribution Plan was terminated
or not continued, the Funds would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
Because each of the Funds is a series of the Trust, amounts paid to the
Distributor as reimbursement for expenses of one series of the Trust may
indirectly benefit the other funds which are series of the Trust. The
Distributor will endeavor to allocate such expenses among such funds in an
equitable manner. The Distributor will not use the proceeds from the contingent
deferred sales charge applicable to a particular class of shares to defray
distribution related expenses attributable to any other class of shares. Various
federal and state laws prohibit national banks and some state-chartered
commercial banks from underwriting or dealing in the Funds' shares. In addition,
state securities laws on this issue may differ from the interpretations of
federal law, and banks and financial institutions may be required to register as
dealers pursuant to state law. In the unlikely event that a court were to find
that these laws prevent such banks from providing such services described above,
the Funds would seek alternate providers and expects that shareholders would not
experience any disadvantage.
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DISTRIBUTIONS FROM THE FUNDS
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Each Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of such Fund. Each Fund's net recognized
investment income consists of all of its respective interest income, dividends
and other ordinary income earned by such Fund on its portfolio assets, less all
expenses of such Fund. Expenses of the Funds are accrued each day. Net long- and
short-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.
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Investors will be entitled to begin receiving dividends on their shares on the
business day after such Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day such Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. Each Fund will
automatically credit dividend distributions and any net long-term capital gain
distributions to a shareholder's account in additional shares of the respective
Fund valued at net asset value, without a sales charge. Unless a shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS.
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TAX STATUS
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FEDERAL TAXES. The Funds each have qualified and intend to continue to
qualify as regulated investment companies under Subchapter M of the Code. To
qualify as a regulated investment company, each Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If each Fund so qualifies and if it
distributes to its shareholders at least 90% of its net investment income
(including tax-exempt interest and other taxable income including net short-term
capital gains, but not net capital gains, which is the excess of net long-term
capital gains over net short-term capital losses), it will not be required to
pay federal income taxes on any income distributed to shareholders. Each Fund
intends to distribute at least the minimum amount of net investment income to
satisfy the 90% distribution requirement. Each Fund will not be subject to
federal income tax on any net capital gain distributed to its shareholders. In
order to avoid a 4% excise tax each Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, a Fund will be treated
as having been distributed.
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If a Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of such Fund's
taxable year, at least 50% of the total of such Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), such Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from
such Fund.
The Internal Revenue Service has publicly ruled that payments of insurance
proceeds representing interest on defaulted tax-exempt obligations are
excludable from gross income to the same extent that such payments would have
been excludable if they had been directly made by the issuer of the insured
obligations. Accordingly, insurance proceeds received by the Insured Fund and
the California Insured Fund under a policy obtained for such securities prior to
their purchase by such Funds or from AMBAC and any other insurer with whom the
Insured Fund and the California Insured Fund maintains a policy described in
this Prospectus will be tax-exempt interest income of the Insured Fund and the
California Insured Fund to the same extent as if such payments were made by the
issuer of the insured obligations, and will be includable by the Insured Fund
and the California Insured Fund in calculating their exempt-interest dividends.
With respect to municipal leases with "non-appropriation" clauses, however,
there can be no assurance that payments made by the insurers on such lease
obligations will be tax-exempt interest income of the Insured Fund or the
California Insured Fund to the same extent as if such payments were made by the
issuer of the obligations and, therefore, includable by the Funds in calculating
their exempt-interest dividends.
Distributions of a Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of a Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of such Fund
have been held by such shareholders. Distributions in excess of the Funds'
earnings and profits, such as distributions of principal, will first reduce the
adjusted tax basis of the shares held by the shareholders and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholders (assuming such shares are held as a capital asset). Each Fund will
inform shareholders of the source and tax status of such distributions promptly
after the
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close of each calendar year. Distributions from the Funds will not be eligible
for the dividends received deduction for corporations.
Exempt-interest dividends allocable to interest received by a Fund on certain
"private activity" obligations issued after August 7, 1986 will be treated as
interest on such obligations and thus will give rise to an item of tax
preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in a Fund may cause shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Redemption or resale of shares of a Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of such Fund and the amount received. If such shares are held as a capital
asset, the gain or loss will be a capital gain or loss and will generally be
long-term if such shareholders have held shares for more than one year. Any loss
realized on shares held for six months or less will be disallowed to the extent
of any exempt-interest dividends received with respect to such shares. If such
loss is not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
shares.
Some of the Funds' investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of a Fund
and affect the holding period of the securities held by a Fund and the character
of gains or losses realized by a Fund. These provisions may also require a Fund
to mark-to-market some of the positions in its portfolio (i.e., treat them as if
they were closed out), which may cause such Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the 90% distribution requirement and the distribution requirement for avoiding
income taxes. Each Fund will monitor its transactions and may make certain tax
elections in order to mitigate the effect of these rules and prevent
disqualification of such Fund as a regulated investment company.
Investments of each Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, each
Fund will be required
52
<PAGE> 132
to accrue as income each year a portion of the discount and to distribute such
income each year in order to maintain its qualification as a regulated
investment company and to avoid federal income taxes. In order to generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and avoid federal income taxes, a Fund may have to dispose of
securities that it would otherwise have continued to hold. Discount relating to
certain stripped tax-exempt obligations may constitute taxable income when
distributed to shareholders.
A Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of a Fund's gross income be derived from the disposition of securities held
for less than three months.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution is actually made.
Each Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
CALIFORNIA TAX STATUS. Under existing California income tax law, if at the
close of each quarter of the California Insured Fund's taxable year at least 50%
of the value of its total assets consists of obligations of the State of
California and its political subdivisions, shareholders of the California
Insured Fund who are subject to the California personal income tax will not be
subject to such tax on distributions with respect to their shares of the
California Insured Fund to the extent that such distributions are attributable
to such tax-exempt interest from such obligations (less expenses applicable
thereto). If such distributions are received by a corporation subject to the
California franchise tax, however, the distributions will be includable in its
gross income for purposes of determining its California franchise tax.
Corporations subject to the California corporate income tax may be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. Under California personal
property tax law, securities owned by the California Insured Fund and any
interest thereon are exempt from such personal property tax. Any proceeds paid
to the California Insured Fund under the insurance policy which represents
matured interest on
53
<PAGE> 133
defaulted obligations should be exempt from California personal income tax if,
and to the same extent as, such interest would have been exempt if paid by the
issuer of such defaulted obligations. Recent amendments to California tax laws
substantially incorporate those provisions of the Code governing the treatment
of regulated investment companies.
GENERAL. The federal and California income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisors regarding the specific federal and California tax consequences of
holding and disposing of shares as well as the effects of other state, local and
foreign tax laws.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for each respective
Fund may include information concerning the historical performance of such Fund.
Any such information will include the average total return of such Fund
calculated on a compounded basis for specified periods of time. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of a Fund's shares. In lieu of or in addition to total
return and yield calculations, such information may include performance rankings
and similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
The yield quotations are determined for each class of a Fund's shares on a
monthly basis with respect to the immediately preceding 30 day period. Yield is
computed by dividing the respective Fund's net investment income per share
earned during such 30 day period by such Fund's maximum offering price per share
on the last day of such period. Net investment income per share for a class of
shares is determined by taking the interest earned by the respective Fund during
the period and allocable to the class of shares, subtracting the expenses (net
of reimbursements) accrued for the period and allocable to the class of shares,
and dividing the result by the product of (a) the average daily number of such
class of shares of the respective Fund outstanding during the period that were
entitled to receive dividends and (b) such Fund's maximum offering price per
share on the last day of the period. The yield calculation formula assumes net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six month period.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of a Fund's yield. A tax-equivalent yield
quotation for a 30 day period as described above is computed for each class of a
Fund's shares by dividing that portion of the yield of such Fund (as computed
above) which is tax-exempt by a percentage equal to 100% minus a stated
percentage income tax rate and adding the result to that portion of such Fund's
yield, if any, that is not tax-exempt.
54
<PAGE> 134
The average compounded total return for each class of a Fund's shares is
calculated by determining the redemption value at the end of specified periods
(after adding back all dividends and other distributions made during the period)
of a $1,000 investment in a class of shares of such Fund (less the maximum sales
charge) at the beginning of the period, annualizing the increase or decrease
over the specified period with respect to such initial investment and expressing
the result as a percentage.
Total return figures utilized by each Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.
Each of the Funds may, in supplemental sales literature, advertise
non-standardized total return figures representing the cumulative,
non-annualized total return of such Fund from a given date to a subsequent given
date. Cumulative non-standardized total return is calculated by measuring the
value of an initial investment in such Fund at a given time, including or
excluding any applicable sales charge as indicated, deducting the respective
Fund's maximum sales charge, determining the value of all subsequent reinvested
distributions, and dividing the net change in the value of the investment as of
the end of the period by the amount of the initial investment and expressing the
result as a percentage.
From time to time either Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for the
respective Fund. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate is determined by annualizing the distributions per share for a
stated period and dividing the result by the public offering price for the same
period. It differs from yield, which is a measure of the income actually earned
by a Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of, such investments during a stated period. Distribution rate
is, therefore, not intended to be a complete measure of a Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by a Fund. Distribution rates will be calculated separately for each
class of a Fund's shares.
From time to time, a Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, a Fund may utilize sales literature that
includes hypotheticals.
55
<PAGE> 135
Further information about the respective Fund's performance is contained in
its Annual Report and its Statement of Additional Information each of which can
be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
Shareholders will receive annual and semiannual reports with financial
statements, as well as proxy statements for shareholders' meetings, if any. Each
Fund is a separate series of the Trust, a Delaware business trust. The Insured
Fund was originally organized as a Maryland corporation under the name Van
Kampen Merritt Insured Tax Free Fund Inc., was subsequently reorganized into a
sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts business trust,
under the name Van Kampen Merritt Insured Tax Free Income Fund as of February
22, 1988 and was again reorganized as a series of the Trust on July 31, 1995.
The California Insured Fund was organized under the name Van Kampen Merritt
California Insured Tax Free Fund as a sub-trust of Van Kampen Merritt Tax Free
Fund and was reorganized as a series of the Trust on July 31, 1995. Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each series on matters affecting an individual series. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of two-thirds of the shares then outstanding cast in person or by proxy at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Funds to the extent required by the 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information of each Fund.
Each Fund's fiscal year end is December 31. Each of the Funds send to their
shareholders, at least semi-annually, reports showing the respective Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent public accountants, is sent to shareholders
each year. After the end of each year, shareholders will receive federal income
tax information regarding dividends and capital gains distributions.
56
<PAGE> 136
Shareholder inquiries should be directed to the Van Kampen American Capital
Insured Tax Free Income Fund or Van Kampen American Capital California Insured
Tax Free Fund, as applicable, One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
For Automated Telephone Service which provides 24 hour direct dial access to
fund facts and shareholder account information dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) Dial (800)
772-8889.
57
<PAGE> 137
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Insured Tax Free Income Fund
or Van Kampen American Capital
California Insured Tax Free Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Insured Tax Free Income Fund
or Van Kampen American Capital
California Insured Tax Free Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 138
------------------------------------------------------------------------------
INSURED TAX FREE
INCOME FUND
------------------------------------------------------------------------------
CALIFORNIA INSURED
TAX FREE FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 139
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Municipal Income Fund (the "Fund") is a separate
diversified mutual fund, organized as a series of Van Kampen American Capital
Tax Free Trust. The Fund's investment objective is to provide a high level of
current income exempt from federal income tax, consistent with preservation of
capital. The Fund seeks to achieve its investment objective by investing at
least 80% of its assets in a diversified portfolio of tax-exempt municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by Standard & Poor's Ratings Group
("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"). Up to
20% of the Fund's total assets may consist of tax-exempt municipal securities
rated below investment grade (but not rated lower than B- by S&P or B3 by
Moody's) and unrated tax-exempt municipal securities believed by the Fund's
investment adviser to be of comparable quality, which involve special risk
considerations. Municipal securities in which the Fund may invest include
conventional fixed-rate municipal securities, variable rate municipal securities
and other types of municipal securities described herein. See "Municipal
Securities." The Fund may invest a substantial portion of its assets in
municipal securities that pay interest that is subject to the alternative
minimum tax. There is no assurance that the Fund will achieve its investment
objective.
The investment adviser for the Fund is Van Kampen American Capital
Investment Advisory Corp. This Prospectus sets forth the information about the
Fund that a prospective investor should know before investing in the Fund.
Please read it carefully and retain it for future reference. The address of the
Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone
number is (800) 421-5666.
------------------
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 140
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 3
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 11
Investment Objective and Policies.............................. 11
Municipal Securities........................................... 12
Investment Practices........................................... 15
Special Considerations Regarding the Fund...................... 19
Investment Advisory Services................................... 20
Alternative Sales Arrangements................................. 22
Purchase of Shares............................................. 24
Shareholder Services........................................... 33
Redemption of Shares........................................... 37
The Distribution and Service Plans............................. 40
Distributions from the Fund.................................... 42
Tax Status..................................................... 43
Fund Performance............................................... 46
Description of Shares of the Fund.............................. 47
Additional Information......................................... 48
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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> 141
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Municipal Income Fund (the "Fund") is a
separate diversified series of Van Kampen American Capital Tax Free Trust (the
"Trust"), an open-end management investment company organized as a Delaware
business trust. See "The Fund."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income tax, consistent
with preservation of capital.
INVESTMENT POLICY. The Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a diversified portfolio of tax-exempt
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") in the case of long-term obligations, and have equivalent ratings in
the case of short-term obligations. Up to 20% of the Fund's total assets may be
invested in tax-exempt municipal securities rated, at the time of investment,
between BB and B-(inclusive) by S&P or between Ba and B3 (inclusive) by Moody's
(or equivalently rated short-term obligations) and unrated tax-exempt municipal
securities that the Fund's investment adviser believes are of comparable
quality. See "Special Considerations Regarding the Fund."
Municipal securities in which the Fund may invest include fixed and variable
rate securities, municipal notes, municipal leases, tax exempt commercial paper,
custodial receipts, participation certificates and derivative municipal
securities the terms of which include elements of, or are similar in effect to,
certain Strategic Transactions (as defined herein) in which the Fund may engage.
The Fund may invest up to 15% of its total assets in derivative variable rate
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range or capped floaters, whose rates are subject to
periodic of lifetime caps. There is no assurance that the Fund will achieve its
investment objective. Debt securities rated below investment grade are commonly
referred to as "junk bonds." The net asset value per share of the Fund may
increase or decrease depending on changes in interest rates and other factors
affecting the municipal credit markets. See "Investment Objective and Policies."
INVESTMENT PRACTICES. The Fund also may use various investment techniques
including engaging in risk management transactions and entering into when-issued
or delayed delivery transactions and various strategic transactions. Such
transactions entail certain risks. See "Municipal Securities" and "Investment
Practices." The Fund may invest a substantial portion of its assets in municipal
securities that
3
<PAGE> 142
pay interest that is subject to the federal alternative minimum tax. The Fund
may not be a suitable investment for investors who are already subject to the
federal alternative minimum tax or who would become subject to the federal
alternative minimum tax as a result of an investment in the Fund. See "Tax
Status."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund offers three classes of its shares which may be purchased at a price
equal to their net asset value per share plus sales charges which, at the
election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares," and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares, and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."
Class A Shares. Class A Shares are subject to an initial sales charge equal to
4.75% of the public offering price (4.99% of the net amount invested), reduced
on investments of $100,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares
automatically convert to Class A Shares six years after the end of the calendar
month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.
4
<PAGE> 143
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares. Class C Shares automatically convert to Class A Shares ten years
after the end of the calendar month in which the investor's order to purchase
was accepted.
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. distributes the
Fund's shares.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 144
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as a
percentage of the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
6
<PAGE> 145
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of
average daily net assets)............. 0.48% 0.48% 0.48%
12b-1 Fees (as a percentage of average
daily net assets)(1).................. 0.25% 1.00% 1.00%
Other Expenses (as a percentage of
average daily net assets)............. 0.26% 0.25% 0.24%
Total Expenses (as a percentage of
average daily net assets)............. 0.99% 1.73% 1.72%
</TABLE>
- ------------------------------------------------------------------------------
(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
7
<PAGE> 146
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ---- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.99% for Class
A Shares, 1.73% for Class B Shares and
1.72% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $57 $78 $100 $163
Class B Shares............................ $58 $89 $109 $167*
Class C Shares............................ $27 $54 $ 93 $203
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $57 $78 $100 $163
Class B Shares............................ $18 $54 $ 94 $167*
Class C Shares............................ $17 $54 $ 93 $203
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after six years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion of
Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Purchase of Shares," "Redemption of Shares,"
"Investment Advisory Services" and "The Distribution and Service Plans."
8
<PAGE> 147
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout each of
the periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
-----------------------------------------------------------------------------------
AUGUST 1,
1990
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992 1991 1990
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $ 14.261 $ 16.164 $ 15.310 $ 15.071 $ 14.250 $14.263
Net Investment Income................... .874 .886 .964 1.041 1.066 .406
Net Realized and Unrealized Gain/Loss on
Investments........................... 1.296 (1.907) .862 .374 .853 (.049)
----- ----- ----- ----- ----- -----
Total from Investment Operations......... 2.170 (1.021) 1.826 1.415 1.919 .357
----- ----- ----- ----- ----- -----
Less:
Distributions from and in Excess of Net
Investment Income(2).................. .882 .882 .972 1.044 1.098 .370
Distributions from and in Excess of Net
Realized Gains(2)..................... 0 .000 .000 .132 .000 .000
----- ----- ----- ----- ----- -----
Total Distributions...................... .882 .882 .972 1.176 1.098 .370
----- ----- ----- ----- ----- -----
Net Asset Value, End of the Period....... $ 15.549 $ 14.261 $ 16.164 $ 15.310 $ 15.071 $14.250
========== ========== ========== ========== ========== ============
Total Return(1).......................... 15.61% (6.37%) 12.20% 9.69% 13.98% 2.57%*
Net Assets at End of Period (in
millions)............................... $ 839.7 $ 495.8 $ 597.6 $ 463.6 $ 293.7 $ 146.6
<CAPTION>
CLASS B SHARES CLASS C SHARES
---------------------------------------------------------- --------------------------
AUGUST 24, 1992
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED YEAR ENDED DISTRIBUTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992 1995 1994
------------ ------------ ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $ 14.263 $ 16.139 $ 15.308 $ 15.481 $ 14.262 $ 16.141
Net Investment Income................... .762 .780 .852 .320 .771 .783
Net Realized and Unrealized Gain/Loss on
Investments........................... 1.294 (1.890) .845 (.033) 1.280 (1.894)
----- ----- ----- ----- ----- -----
Total from Investment Operations......... 2.056 (1.110) 1.697 .287 2.051 (1.111)
----- ----- ----- ----- ----- -----
Less:
Distributions from and in Excess of Net
Investment Income(2).................. .768 .768 .866 .328 .768 .768
Distributions from and in Excess of Net
Realized Gains(2)..................... .000 0 .000 .132 0 .000
----- ----- ----- ----- ----- -----
Total Distributions...................... .768 .768 .866 .460 .768 .768
----- ----- ----- ----- ----- -----
Net Asset Value, End of the Period....... $ 15.549 $ 14.261 $ 16.139 $ 15.308 $ 15.545 $ 14.262
========== ========== ========== ============== ========== ==========
Total Return(1).......................... 14.74% (6.96%) 11.33% 1.90%* 14.74% (6.97%)
Net Assets at End of Period (in
millions)............................... $ 216.6 $ 158.7 $ 168.2 $ 48.4 $ 11.2 $ 3.9
<CAPTION>
CLASS C SHARES
----------------
AUGUST 13, 1993
(COMMENCEMENT OF
DISTRIBUTION) TO
DECEMBER 31,
1993
----------------
<S> <C>
Net Asset Value, Beginning of the
Period.................................. $ 15.990
Net Investment Income................... .300
Net Realized and Unrealized Gain/Loss on
Investments........................... .171
-----
Total from Investment Operations......... .471
-----
Less:
Distributions from and in Excess of Net
Investment Income(2).................. .320
Distributions from and in Excess of Net
Realized Gains(2)..................... .000
-----
Total Distributions...................... .320
-----
Net Asset Value, End of the Period....... $ 16.141
==============
Total Return(1).......................... 2.96%*
Net Assets at End of Period (in
millions)............................... $ 4.1
</TABLE>
(Continued on following page)
See Financial Statements and Notes Thereto
9
<PAGE> 148
FINANCIAL HIGHLIGHTS -- continued (for a share outstanding throughout the
periods)
<TABLE>
<CAPTION> CLASS B
CLASS A SHARES SHARES
----------------------------------------------------------------------------------- ------------
AUGUST 1,
1990
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1992 1991 1990 1995
------------ ------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)(1)......... .99% .99% .87% .86% .59% .89% 1.73%
Ratio of Net Investment Income
to Average Net Assets(1)
(annualized)................... 5.86% 5.93% 6.08% 6.76% 7.29% 7.11% 5.09%
Portfolio Turnover.............. 60.75% 74.96% 81.78% 91.57% 105.99% 108.79% 60.75%
<CAPTION>
CLASS B SHARES CLASS C SHARES
-------------------------------------------- --------------------------------------------
AUGUST 24, 1992 AUGUST 13, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED YEAR ENDED DISTRIBUTION) TO YEAR ENDED YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1995 1994 1993
------------ ------------ ---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)(1)......... 1.70% 1.65% 1.66% 1.72% 1.74% 1.85%
Ratio of Net Investment Income
to Average Net Assets(1)
(annualized)................... 5.22% 5.19% 5.23% 5.24% 5.19% 3.95%
Portfolio Turnover.............. 74.96% 81.78% 91.57% 60.75% 74.96% 81.78%
</TABLE>
- ----------------
(1) Total Return does not reflect the effect of sales charges. During the time
period noted for Class C Shares, no expenses were assumed by the investment
adviser. If certain expenses had not been waived or assumed by the
investment adviser for Class A Shares and Class B Shares, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (annualized)... .99% -- .98% 1.00% 1.07% 1.19% 1.73%
Ratio of Net Investment
Income to Average Net
Assets (annualized)....... 5.86% -- 5.97% 6.62% 6.81% 6.81% 5.09%
Ratio of Expenses to Average
Net Assets (annualized)... -- 1.73% 2.42% -- -- --
Ratio of Net Investment
Income to Average Net
Assets (annualized)....... -- 5.11% 4.48% -- -- --
</TABLE>
(2) Distributions in excess result from temporary differences inherent in the
recognition of interest income and capital gains under generally accepted
accounting principles and for federal income tax purposes.
* Non-Annualized.
See Financial Statements and Notes Thereto
10
<PAGE> 149
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Municipal Income Fund (the "Fund") is a separate
diversified series of Van Kampen American Capital Tax Free Trust (the "Trust"),
which is an open-end management investment company, commonly known as a "mutual
fund," organized as a Delaware business trust. Mutual funds sell their shares to
investors and invest the proceeds in a portfolio of securities. A mutual fund
allows investors to pool their money with that of other investors in order to
obtain professional investment management. Mutual funds generally make it
possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to provide investors with a high level
of current income exempt from federal income tax, consistent with preservation
of capital. The Fund's investment objective is a fundamental policy and may not
be changed without shareholder approval. Under normal market conditions, the
Fund invests at least 80% of its total assets in tax-exempt municipal securities
rated investment grade. The Fund's policy with respect to ratings is not a
fundamental policy, and thus may be changed by the Trustees without shareholder
approval. See "Municipal Securities." The Fund intends, however, to maintain at
all times at least 80% of its total assets in tax-exempt municipal securities
rated investment grade or deemed by the investment adviser to be of comparable
quality at the time of investment. Investment grade securities are securities
rated BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's") in the case of long-term
obligations, and have equivalent ratings in the case of short-term obligations.
According to published guidelines, securities rated BBB by S&P are regarded by
S&P as having an adequate capacity to pay interest and repay principal. Whereas
such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories. According to published
guidelines, securities rated Baa by Moody's are considered by Moody's as medium
grade obligations. Such securities are, in the opinion of Moody's, neither
highly protected nor poorly secured. Interest payments and principal security
appear to Moody's to be adequate for the present but certain
11
<PAGE> 150
protective elements may be lacking or may be characteristically unreliable over
any great length of time. In the opinion of Moody's they lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Up to 20% of the Fund's total assets may be invested in tax-exempt municipal
securities rated, at the time of investment, between BB and B- (inclusive) by
S&P or between Ba and B3 (inclusive) by Moody's (or equivalently rated
short-term obligations) and unrated tax-exempt securities that the Adviser
considers to be comparable quality. These securities are below investment grade
and are regarded by S&P, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. While in the opinion of S&P such securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. These securities
are regarded by Moody's as generally lacking characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the securities' contract over any long period of time may, in the
opinion of Moody's, be small. Debt securities rated below investment grade are
commonly referred to as "junk bonds." For a description of S&P's and Moody's
ratings see the Statement of Additional Information. From time to time the Fund
temporarily may also invest up to 10% of its assets in tax exempt money market
funds. Such instruments will be treated as investments in municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of the Fund's
assets will be invested in municipal securities. The foregoing is a fundamental
policy of the Fund and cannot be changed without approval of the shareholders of
the Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a
12
<PAGE> 151
special excise tax or other specific revenue source. Industrial development
bonds are usually revenue securities, the credit quality of which is normally
directly related to the credit standing of the industrial user involved.
Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Fund may engage. Variable
rate securities bear rates of interest that are adjusted periodically according
to formulae intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. The Fund
will not invest more than 15% of its total assets in derivative municipal
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Such securities may also pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of securities whose rates vary inversely
with market rates of interest generally will be larger than comparable changes
in the value of such municipal securities generally will fluctuate in response
to changes in market rates of interest to a greater extent than the value of an
equal principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets.
While markets for such recent innovations progress through stages of
development, such markets may be less developed than more fully developed
markets for municipal securities. A more detailed description of the types of
municipal securities in which the Fund may invest is included in the Statement
of Additional Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general
13
<PAGE> 152
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Volatility may be
greater during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in lower grade tax-exempt municipal securities or in unrated municipal
securities considered by the Adviser to be of comparable quality. Lower grade
municipal securities are rated between BB and B- by S&P or between Ba and B3 by
Moody's, in each case inclusive of such rating categories. Higher yields are
generally available from municipal securities of such grade. With respect to
such 20% of the Fund's total assets, the Fund has not established any limit on
the percentage of its portfolio which may be invested in securities in any one
rating category.
Investors should carefully consider the risks of owning shares of an
investment company which invests in lower grade municipal securities before
making an investment in the Fund. The higher yield on certain securities held by
the Fund reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. See "Special
Considerations Regarding the Fund."
The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
See "Special Considerations Regarding the Fund."
14
<PAGE> 153
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for the
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. As a result, the Fund will not necessarily invest in the highest
yielding tax-exempt municipal securities permitted by the investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. There is no limitation as to the
maturity of municipal securities in which the Fund may invest. The Adviser may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Other than
for tax purposes, frequency of portfolio turnover will generally not be a
limiting factor if the Fund considers it advantageous to purchase or sell
securities. The Fund may have annual portfolio turnover rates in excess of 100%.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses or dealer costs than a lower rate, which expenses and costs
must be borne by the Fund and its shareholders. High portfolio turnover may also
result in the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status" in
this Prospectus and "Investment Policies and Restrictions" in the Statement of
Additional Information.
DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing the Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions
15
<PAGE> 154
generally will not be treated as investments in tax-exempt municipal securities
for purposes of the Fund's 80% investment policy with respect thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing
16
<PAGE> 155
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. The Strategic Transactions that the Fund may use and some of their
risks are described more fully in the Fund's Statement of Additional
Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
OTHER PRACTICES. The Fund has no restrictions on the maturity of municipal
bonds in which it may invest. The Fund will seek to invest in municipal bonds of
such maturities that, in the judgment of the Fund and the Adviser, will provide
a high level of current income consistent with liquidity requirements and market
conditions.
The Fund may borrow amounts up to 5% of its net assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its net assets to
secure such borrowings.
17
<PAGE> 156
The Fund generally will not invest more than 25% of its total assets in any
industry, nor will the Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Adviser determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds or in issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The securities in which the Fund invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities are generally traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances
18
<PAGE> 157
when, in the judgment of the Adviser, more than one firm can offer comparable
execution services. In selecting among such firms, consideration is given to
those firms which supply research and other services in addition to execution
services. However, it is not the policy of the Adviser, absent special
circumstances, to pay higher commissions to a firm because it has supplied such
services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
- ------------------------------------------------------------------------------
In normal circumstances, the Fund may invest up to 20% of its total assets in
lower grade tax-exempt municipal securities or in unrated municipal securities
considered by the Adviser to be of comparable quality. Lower grade municipal
securities are rated between BB and B- by S&P or between Ba and B3 by Moody's,
in each case inclusive of such rating categories. Investment in lower grade
municipal securities involves special risks as compared with investment in
higher grade municipal securities. The market for lower grade municipal
securities is considered to be less liquid than the market for investment grade
municipal securities which may adversely affect the ability of the Fund to
dispose of such securities in a timely manner at a price which reflects the
value of such security in the Adviser's judgement. The market price for less
liquid securities tends to be more volatile than the market price for more
liquid securities. Illiquid securities and the absence of readily available
market quotations with respect thereto may make the Adviser's valuation of such
securities more difficult, and the Adviser's judgment may play a greater role in
the valuation of the Fund's securities. Lower grade municipal securities
generally involve greater credit risk than higher grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates and individual issuer developments. Because issuers of lower
grade municipal securities frequently choose not to seek a rating of their
municipal securities, the Fund will rely more heavily on the Adviser's ability
to determine the relative investment quality of such securities than if the Fund
invested exclusively in higher grade municipal securities. The Fund may, if
deemed appropriate by the Adviser, retain a security whose rating has been
downgraded below B- by S&P or below B3 by Moody's, or whose rating has been
withdrawn. More detailed information concerning the risks associated with
instruments in lower grade municipal securities is included in the Fund's
Statement of Additional Information.
19
<PAGE> 158
The Fund may invest a substantial portion of its assets in municipal
securities that pay interest that is subject to the federal alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in the Fund.
The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1995 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all municipal securities held by the Fund during the 1995
fiscal year, computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
---------------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
- ---------------------------------- ---------------------- -------------------------
<S> <C> <C>
AAA/Aaa........................... 46.70% 2.50%
AA/Aa............................. 5.70 0.00
A/A............................... 12.40 0.80
BBB/Baa........................... 14.50 8.80
BB/Ba............................. 2.60 2.80
B/B............................... 0.60 1.60
CCC/Caa........................... 0.10 0.80
CC/Ca............................. 0.00 0.00
C/C............................... 0.00 0.00
D................................. 0.00 0.10
------ ------
Percentage of Rated and Unrated
Securities...................... 82.60% 17.40%
====== ======
</TABLE>
The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during periods of relative instability in the market for
lower grade securities. The percentage of the Fund's assets invested in
securities of various grades may from time to time vary substantially from those
set forth above.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and
20
<PAGE> 159
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 sponsor of
the funds mentioned above, is 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 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.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- -------------------------------------------------------- -------------
<S> <C>
First $500 million...................................... 0.50 of 1.00%
Over $500 million....................................... 0.45 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies. The Adviser reserves the
21
<PAGE> 160
right in its sole discretion from time-to-time to waive all or a portion of its
management fee or to reimburse the Fund for all or a portion of its other
expenses.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser has been primarily responsible for the day-to-day management of the
Fund's portfolio since August, 1990. Mr. Johnson has been employed by the
Adviser since April 1989.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end
22
<PAGE> 161
sales charge is superior to electing to purchase Class B Shares or Class C
Shares, each with no front-end sales charge but subject to a CDSC and a higher
aggregate distribution and service fee. However, because initial sales charges
are deducted at the time of purchase of Class A Share accounts under $1 million,
a purchaser of such Class A Shares would not have all of his or her funds
invested initially and, therefore, would initially own fewer shares than if
Class B Shares or Class C Shares had been purchased. On the other hand, an
investor whose purchase would not qualify for price discounts applicable to
Class A Shares and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his or her funds
initially invested in Class B Shares or Class C Shares. If such an investor
anticipates that he or she will redeem such shares prior to the expiration of
the CDSC period applicable to Class B Shares, the investor may wish to acquire
Class C Shares. Investors must weigh the benefits of deferring the sales charge
and having all of their funds invested against the higher aggregate distribution
and service fee applicable to Class B Shares and Class C Shares (discussed
below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Generally, a class of shares subject
to a higher ongoing distribution and service fee or subject to the conversion
feature will have a higher expense ratio and pay lower dividends than a class of
shares subject to a lower ongoing distribution and service fee or not subject to
the conversion feature. The per share net asset values of the different classes
of shares are expected to be substantially the same; from time to time, however,
the per share net asset values of the classes may differ. The net asset value
per share of each class of shares of the Fund will be determined as described in
this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares will be
limited to the extent necessary to preserve the Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
23
<PAGE> 162
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares for sale to the public on a continuous
basis through Van Kampen American Capital Distributors, Inc. (the
"Distributor"), as principal underwriter, which is located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered through members
of the National Association of Securities Dealers, Inc. ("NASD") acting as
securities dealers ("dealers") and through NASD members acting as brokers for
investors ("brokers") or eligible non-NASD members acting as agents for
investors ("financial intermediaries"). The Fund reserves the right to suspend
or terminate the continuous public offering of its shares at any time and
without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or directly with the Distributor plus
any applicable sales charge. Sales personnel or brokers, dealers and financial
intermediaries distributing the Fund's shares may receive different compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. Such payments to
brokers,
24
<PAGE> 163
dealers and financial intermediaries for sales contests, other sales programs
and seminars are made by the Distributor out of its own assets and not out of
the assets of the Fund. These programs will not change the price an investor
pays for shares or the amount that the Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive 90% or more of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933, as amended.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Less than $100,000................ 4.75% 4.99% 4.25%
$100,000 but less than $250,000... 3.75 3.90 3.25
$250,000 but less than $500,000... 2.75 2.83 2.25
$500,000 but less than
$1,000,000...................... 2.00 2.04 1.75
$1,000,000 or more*............... * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to brokers, dealers or
financial intermediaries who initiate and are responsible for purchases
of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08%
on the excess over $5 million. See "Purchase of Shares -- Deferred Sales
Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
25
<PAGE> 164
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted
26
<PAGE> 165
from sale or redemption by the investor until the Letter of Intent is satisfied
or any additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement 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 other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment
27
<PAGE> 166
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
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redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.
(9) Participants in any 403(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: 1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
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<PAGE> 168
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchases of CDSC Shares, all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents and
for selling such shares. The combination of the contingent deferred sales charge
and the distribution fees facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).
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<PAGE> 169
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <C>
First................................................ 4.00%
Second............................................... 3.75%
Third................................................ 3.50%
Fourth............................................... 2.50%
Fifth................................................ 1.50%
Sixth................................................ 1.00%
Seventh and after.................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
CONVERSION FEATURE. Six years or ten years after the end of the month in which
a shareholder's order to purchase a Class B Share or Class C Share,
respectively, of the Fund was accepted, such share automatically will convert to
a Class A Share and no longer will be subject to the higher aggregate
distribution and service fees applicable to Class B Shares and Class C Shares.
The purpose of the conversion feature is to relieve the holders of Class B
Shares and Class C Shares that have been outstanding for a period of time
sufficient for the Distributor to have been compensated for distribution
expenses related to such shares from most of the burden of such
distribution-related expenses. The Fund does not expect to issue any share
certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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
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<PAGE> 170
account (other than those in the sub-account) convert to Class A Shares, an
equal pro rata portion of shares in the respective sub-account also will convert
to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to
32
<PAGE> 171
calculate the net asset value and to adjust the public offering price based
thereon more frequently than once a day if deemed desirable. The net asset value
per share of the different classes of shares are expected to be substantially
the same; from time to time, however, the per share net asset value of the
different classes of shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
- ------------------------------------------------------------------------------
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. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. 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
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<PAGE> 172
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon
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<PAGE> 173
receipt of prior approval of the Adviser. Under normal circumstances, it is the
policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share and Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share and Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request.
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<PAGE> 174
The Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
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<PAGE> 175
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or State Street Bank. Retirement plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the
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<PAGE> 176
redemption request. In the event the redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator, and the name and title
of the individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. The redemption price is the net asset value
per share next determined after the request is received by ACCESS in proper
form. Payment for shares redeemed (less any sales charge, if applicable) will
ordinarily be made by check mailed within three business days after acceptance
by ACCESS of the request and any other necessary documents in proper order. Such
payments may be postponed or the right of redemption suspended as provided by
the rules of the SEC. If the shares to be redeemed have been recently purchased
by check, ACCESS may delay mailing a redemption check until it confirms that the
purchase check has cleared, usually a period of up to 15 days. Any gain or loss
realized on the redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may
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<PAGE> 177
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's other redemption procedures previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a
39
<PAGE> 178
total or partial redemption, but only to redemptions of shares held at the time
of the initial determination of disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers,
40
<PAGE> 179
dealers or financial intermediaries and in connection with the maintenance of
such shareholders' accounts. The Fund pays the Distributor the lesser of the
balance of the 0.25% not paid to such brokers, dealers or financial
intermediaries or the amount of the Distributor's actual distribution related
expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts
41
<PAGE> 180
with respect to a particular CDSC Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such CDSC Share. In such circumstances, a shareholder of such CDSC
Share may be deemed to incur expenses attributable to other shareholders of such
class. As of December 31, 1995, there were $4,203,810 and $10,610 of
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares, respectively, representing 1.94% and 0.09% of the Fund's net assets
attributable to Class B Shares and Class C Shares, respectively. If the
Distribution Plan was terminated or not continued, the Fund would not be
contractually obligated to pay the Distributor for any expenses not previously
reimbursed by the Fund or recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income and dividends, less all expenses of the Fund
attributable to the class of shares in question. Net short-term capital gains,
if any, may be distributed throughout the year. Expenses of the Fund are accrued
each day. Net realized long-term capital gains, if any, are expected to be
distributed, to the extent permitted by applicable law, to shareholders at least
annually. Distributions cannot be assured, and the amount of each monthly
distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee,
42
<PAGE> 181
service fee, or where applicable, the conversion feature will be lower than
distributions with respect to a class of shares subject to a lower distribution
fee, service fee, or not subject to the conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following discussion reflects applicable federal income tax law, as of the
date of this Prospectus:
FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If the Fund so qualifies and if it
distributes each year to its shareholders at least 90% of its net investment
income (including tax-exempt interest and other taxable income including net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses), it will not be
required to pay federal income taxes on any income distributed to shareholders.
The Fund intends to distribute at least the minimum amount of net investment
income to satisfy the 90% distribution requirement. The Fund will not be subject
to federal income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary
43
<PAGE> 182
income for such year and at least 98% of its capital gain net income (the latter
of which is generally computed on the basis of the one-year period ending on
October 31 of such year), plus any required distribution amounts that were not
distributed in previous taxable years. For purposes of the excise tax, any
ordinary income or capital gain net income retained by, and taxed in the hands
of, the Fund will be treated as having been distributed.
If the Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of the Fund's
taxable year, at least 50% of the total of the Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), the Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from the
Fund.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. Distributions in excess of the Fund's earnings
and profits, such as distributions of principal, will first reduce the adjusted
tax basis of the shares held by the shareholders and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such shareholders
(assuming such shares are held as a capital asset). The Fund will inform
shareholders of the source and tax status of such distributions promptly after
the close of each calendar year. Distributions from the Fund will not be
eligible for the dividends received deduction for corporations.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the
44
<PAGE> 183
amount by which a measure of income that includes interest on tax-exempt
obligations exceeds the amount otherwise determined to be the alternative
minimum taxable income. Accordingly, investment in the Fund may cause such
shareholders to be subject to (or result in an increased liability under) the
alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held shares for more than one year. Any loss realized
on shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss to the
extent of any capital gains dividends received with respect to such shares.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid federal income taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid federal income taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold. A portion
of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income to shareholders.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30%
45
<PAGE> 184
of the Fund's gross income be derived from the disposition of securities held
for less than three months.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution is actually made.
The Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their tax advisers
regarding the specific federal tax consequences of holding and disposing of
shares, as well as the effects of state, local and foreign tax laws.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments,
46
<PAGE> 185
and from total return, which is a measure of the income actually earned by, plus
the effect of any realized and unrealized appreciation or depreciation of, such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, the Fund may utilize sales literature that
includes hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized as a sub-trust of a Massachusetts business trust by a
Declaration of Trust dated August 15, 1985, under the name Van Kampen Merritt
Municipal Income Fund and was reorganized as a series of the Trust on July 31,
1995. Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares 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
47
<PAGE> 186
distribution expenses, the liquidation proceeds to holders of Class B Shares and
Class C Shares are likely to be lower than to other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital
Municipal Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
48
<PAGE> 187
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Municipal Income Fund
Custodian
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
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 188
------------------------------------------------------------------------------
MUNICIPAL INCOME
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 189
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM MUNICIPAL INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Intermediate Term Municipal Income Fund,
formerly known as Van Kampen American Capital Limited Term Municipal Income Fund
(the "Fund"), is a separate diversified series of Van Kampen American Capital
Tax Free Trust, an open-end management investment company, commonly known as a
mutual fund. The Fund's investment objective is to seek a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Fund will seek to achieve its investment objective by investing at least 65%
of its total assets in a diversified portfolio of municipal securities rated
investment grade at the time of investment. Investment grade securities are
securities rated BBB or higher by Standard & Poor's Ratings Group or Baa or
higher by Moody's Investors Service, Inc. or comparably rated by any other
nationally recognized statistical ratings organization. The Fund may invest the
remainder of its total assets in municipal securities rated below investment
grade and in unrated municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
(Continued on next page.)
------------------
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL (SM)
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 190
(Continued from previous page.)
Under normal market conditions, the Fund anticipates that it will maintain a
dollar-weighted average life of its portfolio to between three and ten years.
Municipal securities in which the Fund may invest include conventional
fixed-rate municipal securities, variable rate municipal securities and other
types of municipal securities described herein. See "Municipal Securities." The
Fund may invest a substantial portion of its assets in municipal securities that
pay interest that is subject to the alternative minimum tax. There is no
assurance that the Fund will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth certain information about the Fund
that a prospective investor should know before investing in the Fund. Please
read it carefully and retain it for future reference. The address of the Fund is
One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number
is (800) 421-5666.
2
<PAGE> 191
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 7
Annual Fund Operating Expenses and Example..................... 8
Financial Highlights........................................... 10
The Fund....................................................... 11
Investment Objective and Policies.............................. 11
Municipal Securities........................................... 13
Investment Practices........................................... 18
Investment Advisory Services................................... 22
Alternative Sales Arrangements................................. 23
Purchase of Shares............................................. 25
Shareholder Services........................................... 35
Redemption of Shares........................................... 39
The Distribution and Service Plans............................. 42
Distributions from the Fund.................................... 44
Tax Status..................................................... 45
Fund Performance............................................... 49
Description of Shares of the Fund.............................. 49
Additional Information......................................... 50
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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.
3
<PAGE> 192
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Intermediate Term Municipal Income Fund
(the "Fund") is a separate diversified series of Van Kampen American Capital Tax
Free Trust (the "Trust"), which is an open-end management investment company
organized as a Delaware business trust. See "The Fund."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund's investment objective is to seek a high level
of current income exempt from federal income tax, consistent with preservation
of capital.
INVESTMENT POLICIES. The Fund will seek to achieve its investment objective by
investing at least 65% of its total assets in a diversified portfolio of
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or comparably rated by any other nationally recognized statistical
ratings organization ("NRSRO"). The Fund may invest the remainder of its total
assets in municipal securities rated below investment grade and in unrated
municipal securities believed by the Fund's investment adviser to be of
comparable quality, which involve special risk considerations. Securities rated
below investment grade and unrated securities determined by the Fund's
investment adviser to be of comparable quality commonly are referred to as "junk
bonds". Under normal market conditions, the Fund anticipates that it will limit
the dollar-weighted average life of its portfolio to between three and ten
years. There is no assurance that the Fund will achieve its investment
objective. See "Investment Objective and Policies."
Municipal securities in which the Fund may invest include fixed and variable
rate securities, municipal notes, municipal leases, tax exempt commercial paper,
custodial receipts, participation certificates and derivative municipal
securities the terms of which include elements of, or are similar in effect to,
certain Strategic Transactions (as defined herein) in which the Fund may engage.
The Fund may invest up to 15% of its total assets in derivative variable rate
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range or capped floaters, whose rates are subject to
periodic or lifetime caps. The net asset value per share of the Fund may
increase or decrease depending on changes in interest rates and other factors
affecting the municipal securities markets. See "Municipal Securities."
INVESTMENT PRACTICES. The Fund also may use various investment techniques
including engaging in Strategic Transactions and entering into when-issued or
delayed delivery transactions. Such transactions entail certain risks. See
"Municipal Securities" and "Investment Practices." The Fund may invest an
unlimited portion
4
<PAGE> 193
of its assets in municipal securities that pay interest that is subject to the
federal alternative minimum tax. The Fund may not be a suitable investment for
investors who are already subject to the federal alternative minimum tax or who
would become subject to the federal alternative minimum tax as a result of an
investment in the Fund. See "Tax Status."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund offers three classes of shares which may be purchased at a price
equal to their net asset value per share, plus a sales charge which, at the
election of the investor, may be imposed either (i) at the time of the purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares".
Class A Shares. Class A Shares are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but generally are subject to a sales charge if redeemed within four
years of purchase. Class B Shares are subject to a CDSC equal to 3.00% of the
lesser of the then current net asset value or the original purchase price on
Class B Shares redeemed during the first year after purchase, which charge is
reduced each year thereafter. Class B Shares are subject to ongoing distribution
and service fees at an aggregate annual rate of up to 1.00% of the Fund's
average daily net assets attributable to the Class B Shares. Class B Shares
automatically convert to Class A Shares six years after the end of the calendar
month in which the investor's order to purchase was accepted.
5
<PAGE> 194
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed during the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's average daily net assets attributable to the Class C
Shares. Class C Shares automatically convert to Class A Shares ten years after
the end of the calendar month in which the investor's order to purchase was
accepted.
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. distributes the
Fund's shares.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by that
class. See "Distributions from the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 195
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------ ------------ ------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases (as
a percentage of the
offering price)......... 3.25%(1) None None
Maximum sales charge
imposed on reinvested
dividends (as a
percentage of the
offering price)......... None None(3) None(3)
Deferred sales charge (as
a percentage of the
lesser of the original
purchase price or
redemption proceeds).... None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.50% After--None
Year 3--2.00%
Year 4--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)............... None None None
Exchange fees............. None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $25,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternatives -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
7
<PAGE> 196
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees(1) (as a percentage of
average daily net assets)................. 0.00% 0.00% 0.00%
12b-1 fees (as a percentage of average daily
net assets)(2)............................ 0.25% 1.00% 1.00%
Other expenses(1) (as a percentage of
average daily net assets)................. 0.75% 0.75% 0.74%
Total expenses(1) (as a percentage of
average daily net assets)................. 1.00% 1.75% 1.74%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include a waiver of $188,923 of "Management fees" and assumption of
"Other expenses" of $41,405 by the Adviser. If the Adviser did not waive fees
for the fiscal year ending December 31, 1995, the "Management fees" would
have been 0.50% for each class of shares, "Other expenses" would have been
0.86% for Class A Shares, 0.86% for Class B Shares and 0.84% for Class C
Shares and "Total expenses" would have been 1.61% for Class A Shares, 2.36%
for Class B Shares and 2.34% for Class C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25% represent an
asset based sales charge. The asset based sales charge with respect to Class
C Shares includes 0.75% (as a percentage of net asset value) paid to
investors' broker-dealers as sales compensation. As of June 30, 1995, the
Board of Trustees of the Trust reduced 12b-1 and service fees for the Fund's
Class A Shares to 0.25%. See "The Distribution and Service Plans."
8
<PAGE> 197
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 1.00% for Class
A Shares, 1.75% for Class B Shares and
1.74% for Class C Shares (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................. $42 $63 $86 $ 151
Class B Shares............................. $48 $75 $95 $ 168*
Class C Shares............................. $28 $55 $94 $ 205
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................. $42 $63 $86 $ 151
Class B Shares............................. $18 $55 $95 $ 168*
Class C Shares............................. $18 $55 $94 $ 205
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after six years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amount with respect to Class B Shares of
the Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A Shares. Class B Shares acquired through the
exchange privilege are subject to the deferred sales charge schedule relating to
the Class B Shares of the Fund from which the purchase of Class B Shares was
originally made. Accordingly, future expenses as projected could be higher than
those determined in the above table if the investor's Class B Shares were
exchanged from a fund with a higher contingent deferred sales charge. THE
INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER
THAN OR LESS THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Purchase of Shares," "Redemption of Shares," "Investment Advisory
Services" and "The Distribution and Service Plans."
9
<PAGE> 198
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout each of
the periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their reports thereon appear in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS B
CLASS A SHARES SHARES
------------------------------------------- ------------
MAY 28, 1993
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................................. $ 9.330 $ 10.145 $ 9.700 $ 9.319
------ ------ ------ ------
Net Investment Income.................................................... 0.508 0.489 0.278 0.430
Net Realized and Unrealized Gain/Loss on Investments..................... 0.900 (0.815) 0.462 0.916
------ ------ ------ ------
Total from Investment Operations.......................................... 1.408 (0.326) 0.740 1.346
------ ------ ------ ------
Less:
Distributions from Net Investment Income................................. 0.474 0.489 0.273 0.402
Distributions from Net Realized Gain on Investments...................... -- -- 0.022 --
------ ------ ------ ------
Total Distributions....................................................... 0.474 0.489 0.295 0.402
------ ------ ------ ------
Net Asset Value, End of Period............................................ $ 10.264 $ 9.330 $10.145 $ 10.263
========== ========== ========== ==========
Total Return (Non-annualized)(1)(2)....................................... 15.31% (3.32%) 7.75% 14.62%
Net Assets at End of the Period (In millions)............................. $ 15.6 $ 15.7 $ 14.0 $ 17.5
Ratio of Expenses to Average Net Assets(1) (annualized)................... 1.00% .67% .14% 1.75%
Ratio of Net Investment Income to Average Net Assets(1) (annualized)...... 5.10% 5.07% 4.78% 4.33%
Portfolio Turnover........................................................ 75.11% 274.43% 85.56% 75.11%
<CAPTION>
CLASS C
CLASS B SHARES SHARES
----------------------------- ------------
MAY 28, 1993
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1995
------------ ------------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................................. $ 10.137 $ 9.700 $ 9.314
------ ------ ------
Net Investment Income.................................................... 0.417 0.233 0.430
Net Realized and Unrealized Gain/Loss on Investments..................... (0.818) 0.460 0.918
------ ------ ------
Total from Investment Operations.......................................... (0.401) 0.693 1.348
------ ------ ------
Less:
Distributions from Net Investment Income................................. 0.417 0.234 0.402
Distributions from Net Realized Gain on Investments...................... -- 0.022 --
------ ------ ------
Total Distributions....................................................... 0.417 0.256 0.402
------ ------ ------
Net Asset Value, End of Period............................................ $ 9.319 $10.137 $ 10.260
========== ========== ==========
Total Return (Non-annualized)(1)(2)....................................... (4.04%) 7.23% 14.74%
Net Assets at End of the Period (In millions)............................. $ 17.7 $ 13.9 $ 4.9
Ratio of Expenses to Average Net Assets(1) (annualized)................... 1.43% .92% 1.74%
Ratio of Net Investment Income to Average Net Assets(1) (annualized)...... 4.30% 3.95% 4.36%
Portfolio Turnover........................................................ 274.43% 85.56% 75.11%
<CAPTION>
CLASS C SHARES
--------------------------------
OCTOBER 19, 1993
(COMMENCEMENT
OF DISTRIBUTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ----------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................................. $ 10.134 $ 10.250
------ ------
Net Investment Income.................................................... 0.419 0.091
Net Realized and Unrealized Gain/Loss on Investments..................... (0.822) (0.098)
------ ------
Total from Investment Operations.......................................... (0.403) (0.007)
------ ------
Less:
Distributions from Net Investment Income................................. 0.417 0.087
Distributions from Net Realized Gain on Investments...................... -- 0.022
------ ------
Total Distributions....................................................... 0.417 0.109
------ ------
Net Asset Value, End of Period............................................ $ 9.314 $ 10.134
========== ============
Total Return (Non-annualized)(1)(2)....................................... (4.04%) (.10%)
Net Assets at End of the Period (In millions)............................. $ 4.7 $ 0.3
Ratio of Expenses to Average Net Assets(1) (annualized)................... 1.43% .97%
Ratio of Net Investment Income to Average Net Assets(1) (annualized)...... 4.34% 4.05%
Portfolio Turnover........................................................ 274.43% 85.56%
</TABLE>
- ----------------
(1) If certain expenses had not been assumed, total return would have been lower
and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets (annualized).................... 1.61% 1.75% 2.21% 2.36%
Ratio of Net Investment Income to Average Net Assets (annualized)....... 4.49% 3.99% 2.70% 3.72%
Ratio of Expenses to Average Net Assets (annualized).................... 2.50% 2.98% 2.34%
Ratio of Net Investment Income to Average Net Assets (annualized)....... 3.24% 1.89% 3.75%
Ratio of Expenses to Average Net Assets (annualized).................... 2.46% 2.97%
Ratio of Net Investment Income to Average Net Assets (annualized)....... 3.31% 2.06%
</TABLE>
(2) Total Return does not reflect the effect of sales charges.
See Financial Statements and Notes Thereto
10
<PAGE> 199
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Intermediate Term Municipal Income Fund (the
"Fund") is a separate diversified series of Van Kampen American Capital Tax Free
Trust (the "Trust"), which is an open-end management investment company,
commonly known as a "mutual fund," organized as a Delaware business trust.
Mutual funds sell their shares to investors and invest the proceeds in a
portfolio of securities. A mutual fund allows investors to pool their money with
that of other investors in order to obtain professional investment management.
Mutual funds generally make it possible for investors to obtain greater
diversification of their investments and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to seek a high level of current income
exempt from federal income tax, consistent with preservation of capital. The
Fund's investment objective may not be changed without shareholder approval. The
Fund will seek to achieve its investment objective by investing at least 65% of
its total assets in a diversified portfolio of municipal securities rated
investment grade at the time of investment. The Fund may invest the remainder of
its total assets in municipal securities rated below investment grade and in
unrated municipal securities believed by the Fund's investment adviser to be
comparable quality, which involve special risk considerations. Securities rated
below investment grade and unrated securities determined by the Fund's
investment adviser to be of comparable quality commonly are referred to as "junk
bonds". Under normal market conditions, the Fund anticipates that it will limit
the dollar-weighted average life of its portfolio to between three and ten
years. There is no limit with respect to the expected life or stated maturity of
individual municipal securities in which the Fund may invest. The Fund's
policies with respect to ratings and portfolio life are not fundamental
policies, and thus may be changed by the Trustees without shareholder approval.
See "Municipal Securities."
The Fund intends to invest at least 65% of its total assets in municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by Standard & Poor's Ratings Group
("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's") or
comparably rated by any other nationally recognized statistical rating
organization ("NRSRO") in the case of long-term obligations, and have equivalent
ratings in the case of short-term
11
<PAGE> 200
obligations. Securities rated BBB by S&P are regarded by S&P as having an
adequate capacity to pay interest and repay principal. Whereas such securities
normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely, in the opinion of S&P, to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. According to published guidelines, securities
rated Baa by Moody's are considered by Moody's as medium grade obligations. Such
securities are, in the opinion of Moody's, neither highly protected nor poorly
secured. Interest payments and principal security appear to Moody's to be
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. In the opinion
of Moody's they lack outstanding investment characteristics and in fact have
speculative characteristics as well. For a description of S&P's and Moody's
ratings see the Statement of Additional Information. From time to time, the Fund
also may invest up to 10% of its assets in tax exempt money market funds for
cash management purposes. Such instruments will be treated as investments in
municipal securities.
The Fund may invest the remainder of its total assets in municipal securities
rated below investment grade at the time of investment and unrated municipal
securities that the Adviser considers to be of comparable quality to such
securities. According to published guidelines, securities rated below investment
grade are regarded by S&P, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. While in the opinion of S&P such securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. According to
published guidelines, securities rated below investment grade are regarded by
Moody's as generally lacking characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the securities' contract over any long period of time may, in the opinion of
Moody's, be small. Securities rated below investment grade commonly are referred
to as "junk bonds." For a description of S&P's and Moody's ratings see the
Statement of Additional Information.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
NRSRO) downgrades its assessment of the credit characteristics of a particular
issuer. In determining whether the Fund will retain or sell such a security, the
Adviser may consider such factors as the Adviser's assessment of the credit
quality of the issuer of such security, the price at which such security could
be sold and the rating, if any, assigned to such security by other NRSRO.
Under current market conditions, the Fund anticipates that it will limit the
dollar-weighted average life of its portfolio to between three and ten years.
Generally, a portfolio of municipal securities having intermediate
dollar-weighted average life tends to produce a higher level of income than a
portfolio of municipal
12
<PAGE> 201
securities having a shorter dollar-weighted average life and has less net asset
value volatility than a portfolio of municipal securities having a longer
dollar-weighted average life, although such differences cannot be assured. In
addition, market prices of municipal securities with intermediate maturities
generally fluctuate more in response to changes in interest rates than do market
prices of municipal securities with shorter maturities but generally fluctuate
less than market prices of municipal securities with longer maturities. Based on
the foregoing, the Adviser believes that under current market conditions the
yield and price characteristics of a municipal securities portfolio with a
dollar-weighted average life of three to ten years generally offer an attractive
balance between income and interest rate risk. In certain market conditions,
however, such a portfolio may be less attractive because of differences in yield
between municipal securities of different maturities due to supply and demand
forces, monetary and tax policies and investor expectations. In the event of
sustained market conditions that make it less desirable to maintain a dollar-
weighted average portfolio life of three to ten years, the Board of Trustees of
the Trust, after consultation with the Adviser, may change the investment policy
of the Fund with respect to the dollar-weighted average life of the portfolio.
The Fund's investment policy with respect to the dollar-weighted average life of
its portfolio is not a fundamental policy, and may be changed by the Trustees
without obtaining shareholder approval. There is no limitation with respect to
the expected life or stated maturity of individual municipal securities in the
Fund's portfolio.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Municipal securities are debt obligations issued by or on behalf of
the governments of states, territories or possessions of the United States, the
District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of the Fund's
net assets will be invested in municipal securities. The foregoing is a
fundamental policy of the Fund and cannot be changed without approval of the
shareholders of the Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a
13
<PAGE> 202
special excise tax or other specific revenue source. Industrial development
bonds are usually revenue securities, the credit quality of which is normally
directly related to the credit standing of the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, municipal leases, custodial receipts, participation
certificates and derivative municipal securities the terms of which include
elements of, or are similar in effect to, certain Strategic Transactions (as
defined below) in which the Fund may engage. Variable rate securities bear rates
of interest that are adjusted periodically according to formulae intended to
reflect market rates of interest and include securities whose rates vary
inversely with changes in market rates of interest. The Fund will not invest
more than 15% of its total assets in derivative municipal securities such as
inverse floaters, whose rates vary inversely with changes in market rates of
interest, or range floaters or capped floaters, whose rates are subject to
periodic or lifetime caps. Such securities may also pay a rate of interest
determined by applying a multiple to the variable rate. The extent of increases
and decreases in the value of securities whose rates vary inversely with market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets, and
the markets for such securities may be less developed than the market for
conventional fixed rate municipal securities. A more detailed description of the
types of municipal securities in which the Fund may invest is included in the
Statement of Additional Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed-income
municipal securities, the net asset value of the Fund can be expected to change
as general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed-income securities generally can be
expected to rise. Conversely,
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<PAGE> 203
when interest rates rise, the value of a portfolio invested in fixed-income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.
The Fund will invest at least 65% of its total assets in municipal securities
rated investment grade at the time of investment; however, such 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.
The Fund may invest the remainder of its total assets in municipal securities
rated at the time of investment below investment grade or in unrated municipal
securities considered by the Adviser to be of comparable quality to such
securities. Securities rated below investment grade commonly are referred to as
"junk bonds". Higher yields generally are available from such municipal
securities. Investment in such lower grade municipal securities involves special
risks as compared with investment in investment grade municipal securities. The
market for lower grade municipal securities is considered to be less liquid than
the market for investment grade municipal securities, which may adversely affect
the ability of the Fund to dispose of such securities in a timely manner at a
price which, in the Adviser's judgment, reflects the value of such security. The
market price for less liquid securities tends to be more volatile than the
market price for more liquid securities. Illiquid securities and the absence of
readily available market quotations with respect thereto may make the Adviser's
valuation of such securities more difficult, and the Adviser's judgment may play
a greater role in the valuation of the Fund's securities. Lower grade municipal
securities generally involve greater credit risk than investment grade municipal
securities and are more sensitive to adverse economic changes, significant
increases in interest rates and individual issuer developments. Because issuers
of lower grade municipal securities frequently choose not to seek a rating of
their municipal securities, the Fund will rely more heavily on the Adviser's
ability to determine the relative investment quality of such securities than if
the Fund invested exclusively in investment grade municipal securities. More
detailed information concerning the risks associated with instruments in lower
grade municipal securities is included in the Fund's Statement of Additional
Information.
The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During
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<PAGE> 204
periods of reduced market liquidity and in the absence of readily available
market quotations for lower grade municipal securities held in the Fund's
portfolio, the ability of the Adviser to value the Fund's securities becomes
more difficult and the Adviser's use of judgment may play a greater role in the
valuation of the Fund's securities due to the reduced availability of reliable
objective data. The effects of adverse publicity and investor perceptions may be
more pronounced for securities for which no established retail market exists as
compared with the effects on securities for which such a market does exist.
Further, the Fund may have more difficulty selling such securities in a timely
manner and at their stated value than would be the case for securities for which
an established retail market does exist.
The table below sets forth the percentages of the Fund's assets invested as of
December 31, 1995 in the various S&P and Moody's rating categories and in
unrated securities determined by the Adviser to be of comparable quality. The
percentages are based on the dollar-weighted average of credit ratings of all
debt securities held by the Fund during the 1995 fiscal year computed on a
monthly basis.
<TABLE>
<CAPTION>
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING (AS A PERCENTAGE OF (AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE) PORTFOLIO VALUE)
- ---------------------------------- -------------------- ----------------------
<S> <C> <C>
AAA/Aaa........................... 49.80% 0.00%
AA/Aa............................. 10.50% 0.00%
A/A............................... 12.90% 0.00%
BBB/Baa........................... 25.70% 0.00%
BB/Ba............................. 0.90% 0.00%
B/B............................... 0.20% 0.00%
CCC/Caa........................... 0.00% 0.00%
CC/Ca............................. 0.00% 0.00%
CC................................ 0.00% 0.00%
D................................. 0.00% 0.00%
------- ---
Percentage of Rated and Unrated
Debt Securities................. 100.00% 0.00%
================== ===================
</TABLE>
The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during a period in which the Fund did not acquire debt
securities rated below BBB by S&P and Baa by Moody's. The Fund currently may
acquire such debt securities. Accordingly, the percentage of the Fund's assets
invested in securities of various grades may from time to time vary
substantially from those set forth in the above table.
The Fund has not established any limit on the percentage of its portfolio that
may be invested in municipal securities subject to the alternative minimum tax
provisions of federal tax law, and a substantial portion of the income produced
by the Fund may be taxable under the alternative minimum tax. The Fund may not
be a suitable investment for investors who are already subject to the federal
alternative minimum tax or who would become subject to the federal alternative
minimum tax
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<PAGE> 205
as a result of an investment in the Fund. In addition, income earned or deemed
to be earned with respect to the Fund's Strategic Transactions, if any, will be
taxable. See "Tax Status."
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for the
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. As a result, the Fund will not necessarily invest in the highest
yielding tax-exempt municipal securities permitted by the investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. Other than for tax purposes, frequency
of portfolio turnover generally will not be a limiting factor if the Fund
considers it advantageous to purchase or sell securities. The Fund may have
annual portfolio turnover rates in excess of 100%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
Fund and its shareholders. High portfolio turnover may also result in the
realization of substantial net short-term capital gains and any distributions
resulting from such gains will be taxable. See "Tax Status" in this Prospectus
and "Investment Policies and Restrictions" in the Statement of Additional
Information.
TEMPORARY DEFENSIVE STRATEGIES. At times conditions in the markets for tax-
exempt municipal securities may, in the Adviser's judgment, make pursuing the
Fund's basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's (or comparably rated by any other NRSRO); commercial paper rated in the
highest grade by either rating service (or comparably rated by any other NRSRO);
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy. To the
extent that the Fund invests a substantial portion of its assets in taxable
securities for temporary defensive purposes, the Fund will not be
17
<PAGE> 206
invested in a manner primarily designed to achieve a high level of current
income exempt from federal income tax.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Fund's 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
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<PAGE> 207
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including 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
19
<PAGE> 208
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules.
OTHER PRACTICES. The Fund may borrow amounts up to 5% of its net assets in
order to pay for redemptions when liquidation of portfolio securities is
considered disadvantageous or inconvenient and may pledge up to 10% of its net
assets to secure such borrowings.
The Fund generally will not invest more than 25% of its total assets in any
industry, nor will the Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Adviser determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds or in issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
The Fund may invest a substantial portion of its assets in municipal
securities that pay interest that is subject to the federal alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in the Fund.
20
<PAGE> 209
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). See "Investment Policies and Restrictions" in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The securities in which the Fund invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities generally are traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
21
<PAGE> 210
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc., the distributor of the Fund and sponsor of the funds
mentioned above, is 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 and its subsidiaries (some of whom are officers or trustees of
the Fund) 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.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------------------------------------- --------------
<S> <C>
First $500 million..................................... 0.500 of 1.00%
Over $500 million...................................... 0.450 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operations, including
the
22
<PAGE> 211
compensation of the Trustees of the Trust (other than those who are affiliated
persons, as defined in the 1940 Act, of the Adviser, the Distributor or Van
Kampen American Capital), the charges and expenses of independent accountants,
legal counsel, any transfer or dividend disbursing agent and the custodian
(including fees for safekeeping of securities), costs of calculating net asset
value, costs of acquiring and disposing of portfolio securities, interest (if
any) on obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any similar organization,
reports and notices to shareholders, costs of registering shares of the Fund
under the federal securities laws, miscellaneous expenses and all taxes and fees
to federal, state or other governmental agencies. The Adviser reserves the right
in its sole discretion from time-to-time to waive all or a portion of its
management fee or to reimburse the Fund for all or a portion of its other
expenses.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, has been primarily responsible for the day-to-day management of the
Fund's portfolio since June 1995. Mr. Johnson has been employed by the Adviser
since April 1989.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
23
<PAGE> 212
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares or Class C Shares. If
such an investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares. Investors must weigh the benefit of deferring
the sales charge and having all of their funds invested against the higher
aggregate distribution and service fee applicable to Class B Shares and Class C
Shares (discussed below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Generally, a class of shares subject
to a higher ongoing distribution and service fee or subject to the conversion
feature will have a higher expense ratio and pay lower dividends than a class of
shares subject to a lower ongoing distribution and service fee or not subject to
the conversion feature. The per share net asset values of the different classes
of shares are expected to be substantially the same; from time to time, however,
the per share net asset values of the classes may differ. The net asset value
per share of each class of shares of the Fund will be determined as described in
this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares,
24
<PAGE> 213
which expenses typically will be higher with respect to classes of shares
subject to the conversion feature; (ii) printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxy statements to current shareholders of a specific class; (iii)
Securities and Exchange Commission (the "SEC") registration fees incurred by a
class of shares; (iv) the expense of administrative personnel and services as
required to support the shareholders of a specific class; (v) Trustees' fees or
expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares will be
limited to the extent necessary to preserve the Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the public on a continuous basis
through Van Kampen American Capital Distributors, Inc. (the "Distributor"), as
principal underwriter, which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares also are offered through members of the National
Association of Securities Dealers, Inc. ("NASD") acting as securities dealers
("dealers") and through NASD members acting as brokers for investors ("brokers")
or eligible non-NASD members acting as agents for investors ("financial
intermediaries"). The Fund reserves the right to suspend or terminate the
continuous public offering of its shares at any time and without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Fund's shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
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<PAGE> 214
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things, and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund. Also, the Distributor in its discretion may from time to time,
pursuant to objective criteria established by it, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediary for
certain services or activities which are primarily intended to result in sales
of shares of the Fund. Fees may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. Such payments to
brokers, dealers and financial intermediaries for sales contests, other sales
programs and seminars are made by the Distributor out of its own assets and not
out of the assets of the Fund. These programs will not change the price an
investor will pay for shares or the amount that the Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated above, at the discretion of the
Distributor, the entire sales charge may be reallowed to such broker, dealer or
financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive more than 90% of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933, as amended.
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<PAGE> 215
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
--------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ------------------------------------ ----------- ----------- ----------
<S> <C> <C> <C>
Less than $25,000................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000...... 2.75 2.83 2.50
$250,000 but less than $500,000..... 1.75 1.78 1.50
$500,000 but less than $1,000,000... 1.50 1.52 1.25
$1,000,000 or more*................. * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within
one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2
million, plus 0.80% on the next million, plus 0.20% on the next $2
million and 0.08% on the excess over $5 million. See "Purchase of
Shares -- Deferred Sales Charge Alternatives" for additional
information with respect to contingent deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
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<PAGE> 216
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the
28
<PAGE> 217
Distributor. The total sales charge for all other investments made from unit
trust distributions will be 1.00% of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as
29
<PAGE> 218
described herein under "Purchase of Shares -- Class A Shares -- Quantity
Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor
may pay brokers, dealers or financial intermediaries through which
purchases are made an amount up to 0.50% of the amount invested, over a
12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
(9) Participants in any 403(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: 1.00% 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.
30
<PAGE> 219
Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund will receive the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 3.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no contingent deferred sales charge will be imposed on increases in
net asset value above the initial purchase price. In addition, no such charge
will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchase of CDSC Shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the
31
<PAGE> 220
Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution fees facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales change is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value per share since
the time of purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 2.5% (the
applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
32
<PAGE> 221
CLASS B SHARES. Class B Shares redeemed within four years of purchase
generally will be subject to a contingent deferred sales charge at the rates set
forth below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ---------------------------------------------------- -------------------
<S> <C>
First............................................... 3.00%
Second.............................................. 2.50%
Third............................................... 2.00%
Fourth.............................................. 1.00%
Fifth and after..................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
CONVERSION FEATURE. Six years or ten years after the end of the month in which
a shareholder's order to purchase a Class B Share or Class C Share,
respectively, was accepted, such share automatically will convert to a Class A
Share and no longer will be subject to the higher distribution and service fees
applicable to Class B Shares and Class C Shares. The purpose of the conversion
feature is to relieve the holders of Class B Shares and Class C Shares that have
been outstanding for a period of time sufficient for the Distributor to have
been compensated for distribution expenses related to the such shares from most
of the burden of such distribution-related expenses. The Fund does not expect to
issue any share certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of the shares in the respective sub-account
also will convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
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<PAGE> 222
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code and (ii)
the conversion of such shares does not constitute a taxable event under federal
income tax law. The conversion of Class B Shares or Class C Shares to Class A
Shares may be suspended if such an opinion is no longer available. In that
event, no further conversions of such shares would occur and such shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different classes of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
34
<PAGE> 223
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
- ------------------------------------------------------------------------------
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. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the
35
<PAGE> 224
Fund. Such shares are acquired at net asset value (without sales charge) on the
record date of such dividend or distribution. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS. The investor may, on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
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No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal
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plan. This plan provides for the orderly use of the entire account, not only the
income but also the capital, if necessary. Each withdrawal constitutes a
redemption of shares on which taxable gain or loss will be recognized. The plan
holder may arrange for monthly, quarterly, semi-annual, or annual checks in any
amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing
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privilege may be terminated or suspended at any time by the Fund or State Street
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege. A "stop payment" system is not available on
these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
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Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for
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shares redeemed (less any sales charge, if applicable) will ordinarily be made
by check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are
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available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
the shares to be redeemed have been recently purchased by check, ACCESS may
delay mailing a redemption check or wiring redemption proceeds until it confirms
that the purchase check has cleared, usually a period of up to 15 days. If an
account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next
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determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
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THE DISTRIBUTION AND SERVICE PLANS
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The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of its average daily net assets attributable
to the Class A Shares pursuant to the Service Plan in connection with the
ongoing provision of services to holders of such shares by the Distributor and
by brokers, dealers or financial intermediaries and in connection with the
maintenance of shareholders' accounts. The Fund pays the Distributor the lesser
of the balance of the 0.25% not paid to such brokers, dealers or financial
intermediaries or the amount of the Distributor's actual distribution related
expenses.
CLASS B SHARES. The Fund may spend up to 0.75% per year of its average daily
net assets attributable to the Class B Shares pursuant to the Distribution Plan.
In addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net
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assets attributable to the Class B Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to the CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to the CDSC Shares under the Distribution Plan, the Service Plan and
payments received pursuant to the contingent deferred sales charge. In such
event, with respect to the CDSC Shares, any unreimbursed expenses will be
carried forward and paid by the Fund (up to the amount of the actual expenses
incurred) in future years so long as such Distribution Plan is in effect. Except
as mandated by applicable law, the Fund does not impose any limit with respect
to the number of years into the future that such unreimbursed distribution
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1995, there were $149,678
and $325 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 0.86% and less than 0.01%
of the Fund's net assets attributable to
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Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge with respect
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income, dividends and other ordinary income earned by
the Fund, less all expenses of the Fund attributable to the class of shares in
question. Net short-term capital gains, if any, may be distributed throughout
the year. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed, to the extent permitted
by applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent
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receives payment for the shares either through a fed wire or NSCC settlement.
Shares remain entitled to dividends through the day such shares are processed
for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
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TAX STATUS
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The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.
TAXATION. The Fund intends to qualify each year and to elect to be treated as
a regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including tax-exempt interest and other
taxable income including net short-term capital gains, but not net capital
gains, which are the excess of net long-term capital gains over net short-term
capital losses) in each year, it will not be required to pay federal income
taxes on any income distributed to Shareholders. The Fund intends to distribute
at least the minimum amount of net investment income necessary to satisfy the
90% distribution requirement. The Fund will not be subject to federal income tax
on any net capital gains distributed to Shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous
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taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and subject to federal income tax in the hands of,
the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its Shareholders) and all distributions out of earnings and
profits would be taxed to Shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to Shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to certain securities issued at a
discount, the Fund will be required to accrue as income each year a portion of
the discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to dispose of securities that it would otherwise have
continued to hold. A portion of the discount relating to certain stripped
tax-exempt obligations may constitute taxable income when distributed to
Shareholders.
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The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
DISTRIBUTIONS. If the Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, and if, at the close of each quarter
of the Fund's taxable year, at least 50% of the total value of the Fund's total
assets consist of obligations exempt from federal income tax ("tax-exempt
obligations"), the Fund will be qualified to pay exempt-interest dividends to
its Shareholders to the extent of its tax-exempt interest income (including
exempt interest dividends attributable to investments of the Fund in tax-exempt
money market funds) less expenses applicable thereto. Exempt-interest dividends
are treated by Shareholders as interest excludable from their gross income for
federal income tax purposes but are included in determining what portion, if
any, of a person's social security and railroad retirement benefits will be
includable in gross income subject to federal income tax. Such dividends may be
taxable for state and local purposes. Interest with respect to indebtedness
incurred or continued by a Shareholder to purchase or carry shares of the Fund
is not deductible to the extent that such interest relates to exempt-interest
dividends received from the Fund.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to Shareholders as ordinary
income whether paid in cash or reinvested in additional Shares. Distributions of
the Fund's net capital gains ("capital gains dividends"), if any, are taxable to
Shareholders at the rates applicable to long-term capital gains regardless of
the length of time Shares of the Fund have been held by such Shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's Shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming such
Shares are held as a capital asset). It is not expected that any portion of the
distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform Shareholders of the source and
tax status of all distributions promptly after the close of each calendar year.
Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date. Shareholders receiving distributions
in the form of additional Shares purchased by the Plan Agent under the Fund's
Dividend Reinvestment Plan will be treated for federal income tax purposes as
receiving the amount of cash received by the Plan Agent on their behalf. In
general, the basis of such Shares will equal the price paid by the Plan Agent
for such Shares.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on
47
<PAGE> 236
a specified date in such a month and paid during January of the following year
will be treated as having been distributed by the Fund and received by the
Shareholders on the December 31 prior to the date of payment. In addition,
certain other distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid by the Fund (except for purposes of
the 4% excise tax) during such taxable year. In such case, Shareholders will be
treated as having received such dividends in the taxable year in which the
distribution was actually made.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a Shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a measure of income that
includes interest on all tax-exempt obligations exceeds the amount otherwise
determined to be the alternative minimum taxable income. Accordingly, investment
in the Fund may cause Shareholders to be subject to (or result in an increased
liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
Shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES. The sale of Shares (including transfers in connection with a
redemption or repurchase of Shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
Shares and the amount received. If such Shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such Shares
have been held for more than one year. Any loss realized upon a taxable
disposition of Shares held for six months or less will be disallowed to the
extent of any exempt-interest dividends received with respect to such Shares. If
such loss is not entirely disallowed, it will be treated as a long-term capital
loss to the extent of any capital gains dividends received with respect to such
Shares.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of Shares, as
well as the effects of state, local and foreign tax laws and any proposed tax
law changes.
48
<PAGE> 237
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's Shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications. From time
to time, the Fund may compare its performance to certain securities and
unmanaged indices which may have different risk/reward characteristics than the
Fund. Such characteristics may include, but are not limited to, tax features,
guarantees, insurance and fluctuation of principal and/or return. In addition,
from time to time, the Fund may utilize sales literature that includes
hypotheticals.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by the Fund's
investments 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.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
49
<PAGE> 238
originally organized in 1993 under the name Van Kampen Merritt Limited Term
Municipal Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
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.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represent an interest in the same assets of the Fund and are identical in
all respects except that each class bears certain distribution expenses and has
exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares 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
holders of Class B Shares and Class C Shares are likely to be lower than to
holders of Class A Shares.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of
50
<PAGE> 239
each year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital
Intermediate Term Municipal Income Fund, One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
51
<PAGE> 240
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Intermediate Term Municipal
Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Intermediate Term Municipal
Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 241
------------------------------------------------------------------------------
INTERMEDIATE TERM
MUNICIPAL INCOME
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 242
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
FLORIDA INSURED TAX FREE INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Florida Insured Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund, organized as a separate series of Van
Kampen American Capital Tax Free Trust. The Fund's investment objective is to
provide investors a high level of current income exempt from federal income tax
and Florida intangible personal property taxes, consistent with preservation of
capital. The Fund is designed for investors who are residents of Florida for tax
purposes. Under normal market conditions, the Fund seeks to achieve its
investment objective by investing at least 80% of its assets in a portfolio of
Florida municipal securities that are insured as to timely payment of both
principal and interest by an entity whose claims-paying ability is rated AAA by
Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or an equivalent rating from another nationally recognized
statistical rating organization. Insured municipal securities in which the Fund
may invest include conventional fixed-rate municipal securities, variable rate
municipal securities and other types of municipal securities described herein.
Up to 20% of the Fund's total assets may consist of uninsured Florida municipal
securities rated investment grade at the time of investment. See "Municipal
Securities." There is no assurance that the Fund will achieve its investment
objective.
(Continued on next page.)
------------------
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL (SM)
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 243
(Continued from previous page.)
The investment adviser for the Fund is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
(800) 421-5666.
2
<PAGE> 244
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 10
Investment Objective and Policies.............................. 10
Municipal Securities........................................... 12
Investment Practices........................................... 15
Special Considerations Regarding the Fund...................... 18
Investment Advisory Services................................... 20
Alternative Sales Arrangements................................. 22
Purchase of Shares............................................. 24
Shareholder Services........................................... 34
Redemption of Shares........................................... 38
The Distribution and Service Plans............................. 41
Distributions from the Fund.................................... 43
Tax Status..................................................... 44
Fund Performance............................................... 49
Description of Shares of the Fund.............................. 50
Additional Information......................................... 50
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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.
3
<PAGE> 245
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Florida Insured Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund, organized as a separate series of Van
Kampen American Capital Tax Free Trust. See "The Fund."
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income tax and Florida
intangible personal property taxes, consistent with preservation of capital. The
Fund is designed for investors who are residents of Florida for tax purposes.
INVESTMENT POLICIES. Under normal market conditions, the Fund seeks to achieve
its investment objective by investing at least 80% of its assets in a portfolio
of Florida municipal securities that are insured as to timely payment of both
principal and interest by an entity whose claims-paying ability is rated AAA by
Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's Investors Service,
Inc. ("Moody's") or an equivalent rating from another nationally recognized
statistical rating organization ("NRSRO"). Up to 20% of the Fund's total assets
may consist of uninsured Florida municipal securities rated investment grade at
the time of investment. Investment grade securities are securities rated BBB or
higher by S&P or Baa or higher by Moody's or an equivalent rating from another
NRSRO. Up to 20% of the Fund's assets may be invested in municipal securities
that are subject to federal alternative minimum tax. See "Investment Objectives
and Policies," "Municipal Securities" and "Special Considerations Regarding the
Fund."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
PURCHASE OF SHARES. Shares of the Fund are offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, and
through selected brokers and dealers. The offering price is the net asset value
per share next determined following receipt of an order plus a sales charge
which, at the option of the investor, may be imposed at the time of purchase or
on a contingent deferred basis. Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The minimum initial investment is $500 for each class of shares and
the minimum subsequent investment is $25 for each class of shares (or less as
described under "Purchase of Shares"). The different classes of shares permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. See "Purchase
of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
4
<PAGE> 246
SPECIAL RISK FACTORS. The Fund may invest up to 20% of its assets in certain
derivative securities such as inverse floaters. Investment in such derivative
securities involves significant risks. Under normal market conditions, the Fund
will invest substantially all of its assets in insured Florida municipal
securities, and therefore it will be more susceptible to factors adversely
affecting issuers of Florida municipal securities than a municipal securities
fund that does not invest in Florida municipal securities to this degree. There
can be no assurance that the Fund will achieve its objective. See "Special
Considerations Regarding the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 247
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
the offering price).......... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the
offering price).............. None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds)......... None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed).................... None None None
Exchange fees.................. None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Deferred Sales Charge Alternative -- Class A Shares of $1
million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
6
<PAGE> 248
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
---------- ---------- ----------
<S> <C> <C> <C>
Management fees(1) (as a
percentage of average daily net
assets)......................... 0.00% 0.00% 0.00%
12b-1 fees(1)(2) (as a percentage
of average daily net assets).... 0.25% 1.00% 1.00%
Other expenses(1) (as a percentage
of average daily net assets).... 0.19% 0.12% 0.13%
Total expenses(1) (as a percentage
of average daily net assets).... 0.44% 1.12% 1.13%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include a waiver of $121,439 of "Management fees" and assumption of
$183,980 of "Other Expenses" by the Adviser. If the Adviser did not waive
fees for the fiscal year ending December 31, 1995, the "Management fees"
would have been 0.50% for each class of shares, "Other expenses" would have
been 0.95% for Class A Shares, 0.88% for Class B Shares and 0.89% for Class
C Shares and "Total expenses" would have been 1.70% for Class A Shares,
2.38% for Class B Shares and 2.39% for Class C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
7
<PAGE> 249
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ---- ---- -----
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming (i)
an operating expense ratio of 0.44%
for Class A Shares, 1.12% for Class
B Shares and 1.13% for Class C
Shares, (ii) 5% annual return and
(iii) redemption at the end of each
time period:
Class A Shares...................... $52 $61 $71 $ 100
Class B Shares...................... $51 $71 $77 $ 108*
Class C Shares...................... $22 $36 $62 $ 137
You would pay the following expenses
on the same $1,000 investment
assuming no redemption at the end of
each period:
Class A Shares...................... $52 $61 $71 $ 100
Class B Shares...................... $11 $36 $62 $ 108*
Class C Shares...................... $12 $36 $62 $ 137
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after seven years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amount with respect to Class B Shares of
the Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A Shares. THE INFORMATION CONTAINED IN THE
ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more
complete description of such costs and expenses, see "Purchase of Shares,"
"Redemption of Shares," "Investment Advisory Services" and "The Distribution and
Service Plans."
8
<PAGE> 250
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout each
of the periods indicated. The financial highlights have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, for each of the
periods indicated and their report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS B
CLASS A SHARES SHARES
---------------------------- ------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995
------------ ------------- ------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................. $ 13.796 $14.300 $ 13.792
------- ------- -------
Net Investment Income................................................... .789 .291 .685
Net Realized and Unrealized Gain/Loss on Investments.................... 1.416 (.507) 1.415
------- ------- -------
Total from Investment Operations......................................... 2.205 (.216) 2.100
------- ------- -------
Less:
Distributions from and in excess of Net Investment Income(1)............ .798 .288 .691
------- ------- -------
Net Asset Value, End of the Period....................................... $ 15.203 $13.796 $ 15.201
======= ======= =======
Total Return(2)(3)....................................................... 16.29% (1.47%)(5) 15.53%
Net Assets at End of Period (in millions)................................ $ 16.2 $ 9.0 $ 16.9
Ratio of Expenses to Average Net Assets(2)(4)............................ .44% .49% 1.12%
Ratio of Net Investment Income to Average Net Assets(2)(4)............... 5.33% 5.13% 4.66%
Portfolio Turnover....................................................... 41.10% 19.30% 41.10%
<CAPTION>
CLASS B
SHARES CLASS C SHARES
------------- ----------------------------
JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS)
TO YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................. $14.300 $ 13.786 $14.300
------- ------- -------
Net Investment Income................................................... .251 .690 .249
Net Realized and Unrealized Gain/Loss on Investments.................... (.509) 1.428 (.513)
------- ------- -------
Total from Investment Operations......................................... (.258) 2.118 (.264)
------- ------- -------
Less:
Distributions from and in excess of Net Investment Income(1)............ .250 .691 .250
------- ------- -------
Net Asset Value, End of the Period....................................... $13.792 $ 15.213 $13.786
======= ======= =======
Total Return(2)(3)....................................................... (1.81%)(5) 15.61% (1.81%)(5)
Net Assets at End of Period (in millions)................................ $ 10.9 $ 461.8 $ 11.4
Ratio of Expenses to Average Net Assets(2)(4)............................ 1.26% 1.13% 1.26%
Ratio of Net Investment Income to Average Net Assets(2)(4)............... 4.31% 4.51% 4.28%
Portfolio Turnover....................................................... 19.30% 41.10% 19.30%
</TABLE>
- ----------------
(1) See Note 1 to the Financial Statements.
(2) If certain expenses had not been waived or assumed by the investment
adviser, total return would have been lower and the ratios would have been
as follows:
<TABLE>
<S> <C> <C> <C>
Ratio of Expenses to Average Net Assets(4)............................... 1.70% 1.99% 2.38%
Ratio of Net Investment Income to Average Net Assets..................... 4.07% 3.64% 3.40%
Ratio of Expenses to Average Net Assets(4)............................... 2.75% 2.39% 2.74%
Ratio of Net Investment Income to Average Net Assets..................... 2.81% 3.25% 2.81%
</TABLE>
(3) The Total Return does not reflect the effect of sales charges.
(4) Beginning with the year ended December 31, 1995, the Ratios of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances.
(5) Non-Annualized.
See Financial Statements and Notes Thereto
9
<PAGE> 251
- ------------------------------------------------------------------------------
THE FUND
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Van Kampen American Capital Florida Insured Tax Free Income Fund (the "Fund")
is a non-diversified, separate series of Van Kampen American Capital Tax Free
Trust (the "Trust"), an open-end management investment company, commonly known
as a "mutual fund," organized as a Delaware business trust. Mutual funds sell
their shares to investors and invest the proceeds in a portfolio of securities.
A mutual fund allows investors to pool their money with that of other investors
in order to obtain professional investment management. Mutual funds generally
make it possible for investors to obtain greater diversification of their
investments and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates act as investment adviser to other mutual funds distributed by Van
Kampen American Capital Distributors, Inc. ("the Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
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INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to provide investors a high level of
current income exempt from federal income tax and Florida intangible personal
property taxes, consistent with preservation of capital. The Fund is designed
for investors who are residents of Florida for tax purposes. The Fund's
investment objective is a fundamental policy and may not be changed without
shareholder approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). Under normal market conditions, the Fund will invest up to 80%
of its assets in Florida municipal securities that are insured as to timely
payment of both principal and interest by an entity whose claims-paying ability
is rated AAA by Standard & Poor's Ratings Group ("S&P") or Aaa by Moody's
Investors Service, Inc. ("Moody's") or an equivalent rating from another
nationally recognized statistical rating organization ("NRSRO"). Up to 20% of
the Fund's total assets may consist of uninsured Florida municipal securities
rated investment grade at the time of investment. Investment grade securities
are securities rated BBB or higher by S&P or Baa or higher by Moody's, or an
equivalent rating by another NRSRO. There are market risks inherent in all
investments in securities; and accordingly there can be no assurance the Fund
will achieve its investment objective. 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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For a description of S&P's and Moody's claims-paying ability ratings and
municipal securities ratings see the Statement of Additional Information. From
time to time, the Fund temporarily may invest up to 10% of its assets in tax
exempt money market funds. Such instruments will be treated as investments in
municipal securities.
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for the
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and Florida intangible personal property taxes and will
select securities which the Adviser believes entail reasonable credit risk
considered in relation to the investment policies of the Fund. As a result, the
Fund will not necessarily invest in the highest yielding Florida municipal
securities permitted by its investment policies if the Adviser determines that
market risks or credit risks associated with such investments would subject the
Fund's portfolio to undue risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. Other than for tax purposes, frequency of portfolio turnover
generally will not be a limiting factor if the Fund considers it advantageous to
purchase or sell securities. The Fund anticipates that its annual portfolio
turnover rate normally will be less than 200%. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expenses or dealer costs
than a lower rate, which expenses and costs must be borne by the Fund and its
shareholders. High portfolio turnover may also result in the realization of
substantial net short-term capital gains and any distributions resulting from
such gains will be taxable. See "Tax Status" in this Prospectus and "Investment
Policies and Restrictions" in the Statement of Additional Information.
TEMPORARY DEFENSIVE STRATEGIES. At times, conditions in the markets for
Florida insured municipal securities may, in the Adviser's judgment, make
pursuing the Fund's basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Adviser may use alternative
strategies primarily designed to reduce fluctuations in the value of the Fund's
assets. In implementing these "defensive" strategies, the Fund may invest to a
substantial degree in high-quality, short-term Florida municipal obligations. If
such municipal obligations are not available or, in the Adviser's judgment, do
not afford sufficient protection against adverse market conditions, the Fund may
invest in high-quality, municipal securities of issuers other than issuers of
Florida municipal securities. Furthermore, if such high-quality securities are
not available or, in the Adviser's judgment, do not afford sufficient protection
against adverse market conditions, the Fund may invest in taxable obligations.
Such taxable obligations may include: obligations of the U.S. Government, its
agencies or instrumentalities; other debt securities rated within the four
highest categories by either S&P or Moody's (or comparably rated by another
NRSRO); commercial paper rated in the highest grade by either rating service (or
comparably rated by another NRSRO); certificates of deposit and bankers'
acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Adviser considers
consistent with such strategy. To the extent that the Fund invests a substantial
portion of its assets in
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municipal securities other than Florida municipal securities or taxable
securities for temporary defensive purposes, the Fund will not be invested in a
manner primarily designed to achieve a high level of current income exempt from
federal income tax and Florida intangible personal property taxes. The Fund may
invest in insured and uninsured securities for temporary defensive purposes.
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MUNICIPAL SECURITIES
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GENERAL. Municipal securities are obligations issued by or on behalf of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel or other counsel to the issuer
of such securities is, at the time of issuance, exempt from federal income tax.
Florida municipal securities are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is at the time of issuance exempt from Florida intangible personal property
taxes. Under normal market conditions, at least 80% of the Fund's assets will be
invested in Florida municipal securities. The policy stated in the foregoing
sentence is a fundamental policy of the Fund and cannot be changed without
approval of the shareholders of the Fund. Up to 20% of the Fund's assets may be
invested in securities that are subject to federal alternative minimum tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, municipal leases, custodial receipts, participation
certificates and derivative municipal securities the terms of which include
elements of, or are similar in effect to, certain Strategic Transactions (as
defined below) in which the Fund may engage. Variable rate securities bear rates
of interest that are adjusted periodically according to formulae intended to
reflect market rates of interest. The Fund may also invest in derivative
variable rate securities such as inverse floaters, whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
generally
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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. The Fund will not invest more than 20% of its total
assets in securities whose rates vary inversely with changes in market rates of
interest.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities. Certain municipal lease obligations may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Participation certificates are obligations issued by state or local governments
or authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Other than as set forth above, there is
no limitation with respect to the amount of the Fund's assets that may be
invested in the foregoing types of municipal securities. Certain of the
municipal securities in which the Fund may invest represent relatively recent
innovations in the municipal securities markets and the markets for such
securities may be less developed than the market for conventional fixed rate
municipal securities. A more detailed description of the types of municipal
securities in which the Fund may invest is included in the Statement of
Additional Information.
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 invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments. The net asset value of the
Fund will change with changes in the value of its portfolio securities. Because
the Fund will invest primarily in fixed income municipal securities, the net
asset value of the Fund can be expected to change as general levels of interest
rates fluctuate. When interest rates decline, the value of a portfolio invested
in fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. The prices of longer term
municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Up to 20% of the Fund's assets may be invested in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum
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tax or who would become subject to the federal alternative minimum tax as a
result of an investment in the Fund. In addition, income earned or deemed to be
earned with respect to the Fund's Strategic Transactions, if any, will be
taxable. See "Tax Status."
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
INSURED MUNICIPAL SECURITIES. Insured Florida municipal securities in which
the Fund may invest will be covered by Original Issue Insurance, Secondary
Market Insurance or Portfolio Insurance. Original Issue Insurance is purchased
with respect to a particular issue of municipal securities by the issuer thereof
or a third party in conjunction with the original issue of such municipal
securities. Secondary Market Insurance is purchased by the Fund or a third party
subsequent to the time of original issuance of a municipal security. Both
Original Issue Insurance and Secondary Market Insurance remain in effect as long
as the municipal securities covered thereby remain outstanding and the insurer
remains in business, regardless of whether the Fund ultimately disposes of such
municipal securities. Portfolio Insurance may be purchased by the Fund with
respect to municipal securities which the Fund intends to purchase or already
owns and would generally terminate when the municipal security is sold by the
Fund or redeemed. There is no limitation on the percentage of the Fund's assets
that may be invested in Florida municipal securities insured by any given
insurer.
Original Issue Insurance, Secondary Market Insurance and Portfolio Insurance
generally do not insure payment on an accelerated basis, the payment of any
redemption premium (except with respect to certain premium payments in the case
of certain small issue industrial development and pollution control municipal
securities), the value of the Fund's shares or the market value of the Fund's
portfolio securities. Such insurance also does not insure against nonpayment of
principal of or interest on municipal securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.
The Fund's policy of investing in Florida municipal securities insured by
insurers whose claims-paying ability is rated Aaa by Moody's, AAA by S&P or the
equivalent by another NRSRO will apply only at the time of the Fund's investment
in a Florida municipal security. A subsequent downgrade by Moody's, S&P or
another NRSRO of an insurer's claims-paying ability would result in a downgrade
of the rating assigned to the Florida municipal securities insured by such
insurer, although the Florida municipal securities may have an independent
rating that is higher than the new rating assigned to the insurer's
claims-paying ability. The securities could experience a decrease in market
price as a result of such a downgrade. In the event the ratings assigned to such
municipal securities decline to below investment grade, such municipal
securities would probably become less
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liquid or even illiquid. There can be no assurance that an insurer will be able
to honor its obligations with respect to Florida municipal securities in the
Fund's portfolio. For a description of S&P's and Moody's claims-paying ability
ratings of insurers, see the Statement of Additional Information.
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INVESTMENT PRACTICES
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In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Fund's 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
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addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Income earned or deemed to be earned by the Fund from, among other things, its
Strategic Transactions and temporary defensive strategies, if any, generally
will be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to
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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.
OTHER PRACTICES. The Fund may borrow amounts up to 5% of its net assets in
order to pay for redemptions when liquidation of portfolio securities is
considered disadvantageous or inconvenient and may pledge up to 10% of its net
assets to secure such borrowings.
Under normal market conditions, the Fund will invest substantially all of its
assets in insured Florida municipal securities. The Fund generally will not
invest more than 25% of its total assets in any industry. Governmental issuers
of municipal securities are not considered part of any "industry." However,
municipal securities backed only by the assets and revenues of nongovernmental
users may for this purpose be deemed to be issued by such nongovernmental users,
and the 25% limitation would apply to such obligations. It is therefore possible
that the Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or airport revenue
obligations if the Adviser determines that the yields available from obligations
in a particular segment of the market justifies the additional risks associated
with a large investment in such segment. Although such obligations could be
supported by the credit of governmental users, or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such a market segment.
From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of Florida municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.
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PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The income securities in which the Fund invests are
traded principally in the over-the-counter market. In the over-the-counter
market, securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
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SPECIAL CONSIDERATIONS REGARDING THE FUND
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GENERAL. The Fund may invest up to 20% of its total assets in derivative
variable rate securities such as inverse floaters whose rates of interest vary
inversely with changes in market rates of interest. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Investment in such securities involve special
risks as compared to a fixed rate municipal
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security. The extent of increases and decreases in the value of inverse floaters
and the corresponding change to per share net asset value of the Fund 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. The markets for inverse variable rate securities may be
less developed than the market for conventional fixed rate municipal securities.
SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES. As described in
this Prospectus, under normal market conditions the Fund will invest
substantially all of its assets in Florida municipal securities. The Fund is
therefore susceptible to political, economic, regulatory or other factors
affecting issuers of Florida municipal securities. Investors should be aware of
certain factors that might affect the financial condition of the issuers of
Florida municipal securities.
The following information is a summary of a more detailed description of
certain factors affecting Florida municipal securities which is contained in the
Statement of Additional Information. Investors should obtain a copy of the
Statement of Additional Information for the more detailed discussion of such
factors. Such information is derived from certain official statements of the
State of Florida published in connection with the issuance of specific Florida
municipal securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole.
Florida's economic outlook is projected generally to reflect the national
economic outlook; however, unemployment levels during the past several years
have been above the national level and are estimated to continue to be above the
national level for the State's 1995-96 fiscal year which ends June 30, 1996.
Historically, Florida's unemployment rate has generally tracked below that of
the nation; however, since 1989 the State's jobless rate has moved ahead of the
national average. The average rate of unemployment for Florida since 1985 is
6.3% while the national average during the same time period is 5.7%. Florida's
unemployment rate is forecasted at 5.6% for fiscal year 1995-96 and fiscal year
1996-97.
For the State fiscal year which ended June 30, 1995, receipts from the sales
and use tax, the greatest single source of tax revenue to the State of Florida,
were $10,692 million, an increase of 6.0% from fiscal year 1993-94.
Tourism is one of Florida's most important industries. Approximately 39.9
million people visited the State in 1994. Tourist arrivals are expected to
increase by 0.1% in 1996 and by 4.3% in 1997. By the end of fiscal year 1995-96
41.4 million domestic and international tourists are expected to have visited
the state. In 1996-97, tourist arrivals should approximate 43.2 million.
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County and municipal governments in Florida depend primarily upon ad valorem
property taxes, sales, motor fuel and other local excise taxes and miscellaneous
revenue sources, including revenues from utilities services. Florida school
districts derive substantially all of their revenues from local property taxes.
The overall level of revenue from these sources is in part dependent upon the
local, state and national economies. Local government obligations held by the
Fund may constitute general obligations or may be special obligations payable
solely from one or more specified revenue sources. The ability of the local
governments to repay their obligations on a timely basis will be dependent upon
the continued strength of the revenues pledged and of the overall fiscal status
of the local government.
Voters at the general election in November 1994 approved an amendment to the
Constitution of the State of Florida limiting future state revenues. It is
unclear at this time what effect, if any, such amendment would have on state or
local government debt obligations.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
More detailed information concerning Florida municipal securities and the
State of Florida is included in the Statement of Additional Information.
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INVESTMENT ADVISORY SERVICES
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THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc., the distributor of the Fund and sponsor of the funds
mentioned above, is 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
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investment firm. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general partners
of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A.
Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe
and Andrall E. Pearson each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 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.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------------------------------------- --------------
<S> <C>
First $500 million..................................... 0.500 of 1.00%
Over $500 million...................................... 0.450 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operations, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the 1940 Act, of the Adviser, the Distributor
or Van Kampen American Capital), the charges and expenses of independent
accountants, legal counsel, any transfer or dividend disbursing agent and the
custodian (including fees for safekeeping of securities), costs of calculating
net asset value, costs of acquiring and disposing of portfolio securities,
interest (if any) on obligations incurred by the Fund, costs of share
certificates, membership dues in the Investment Company Institute or any similar
organization, reports and notices to shareholders, costs of registering shares
of the Fund under the federal securities laws, miscellaneous expenses and all
taxes and fees to federal, state or other governmental agencies. The Adviser
reserves the right in its sole discretion from time-to-time to waive all or a
portion of its management fee, or to reimburse the Fund for all or a portion of
its other expenses.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
21
<PAGE> 263
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson has been employed by the Adviser since April 1989. Mr. Piraro, a Vice
President of the Adviser, has been primarily responsible for the day-to-day
management of the Fund's portfolio since August 1995. Mr. Piraro has been
employed by the Adviser since May 1992. Prior to May 1992, Mr. Piraro was
employed by First Chicago Capital Markets.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Shares accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end
22
<PAGE> 264
sales charge is superior to electing to purchase Class B Shares or Class C
Shares, each with no front-end sales charge but subject to a CDSC and a higher
aggregate distribution and service fee. However, because initial sales charges
are deducted at the time of purchase of Class A Share accounts under $1 million,
a purchaser of such Class A Shares would not have all of his or her funds
invested initially and therefore, would initially own fewer shares than if Class
B Shares or Class C Shares had been purchased. On the other hand, an investor
whose purchase would not qualify for price discounts applicable to Class A
Shares and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his or her funds
initially invested in Class B Shares or Class C Shares. If such an investor
anticipates that he or she will redeem such shares prior to the expiration of
the CDSC period applicable to Class B Shares, the investor may wish to acquire
Class C Shares. Investors must weigh the benefit of deferring the sales charge
and having all of their funds invested against the higher aggregate distribution
and service fee applicable to Class B Shares and Class C Shares (discussed
below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Generally, a class of shares subject
to a higher ongoing distribution and service fee or subject to the conversion
feature will have a higher expense ratio and pay lower dividends than a class of
shares subject to a lower ongoing distribution and service fee or not subject to
the conversion feature. The per share net asset values of the different classes
of shares are expected to be substantially the same; from time to time, however,
the per share net asset values of the classes may differ. The net asset value
per share of each class of shares of the Fund will be determined as described in
this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the"SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares
23
<PAGE> 265
will be limited to the extent necessary to preserve the Fund's qualification as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the public on a continuous basis
through Van Kampen American Capital Distributors, Inc. (the "Distributor"), as
principal underwriter, which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares also are offered through members of the National
Association of Securities Dealers, Inc. ("NASD") acting as securities dealers
("dealers") and through NASD members acting as brokers for investors ("brokers")
or eligible non-NASD members acting as agents for investors ("financial
intermediaries"). The Fund reserves the right to suspend or terminate the
continuous public offering of its shares at any time and without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or directly with the Distributor plus
any applicable sales charge. Sales personnel or brokers, dealers and financial
intermediaries distributing the Fund's shares may receive different compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily
24
<PAGE> 266
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. In addition, the Distributor may provide additional
compensation to Edward D. Jones & Co. or an affiliate thereof based on a
combination of its sales of shares and increases in assets under management.
Such payments to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets of the Fund. These programs will not
change the price an investor pays for shares or the amount that the Fund will
receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
dealers who receive 90% or more of the sales charge may be deemed to be
"underwriters" as that term is defined in the Securities Act of 1933, as
amended.
25
<PAGE> 267
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
- --------------------------------- --------------- ---------------- --------------
<S> <C> <C> <C>
Less than $100,000............... 4.75% 4.99% 4.25%
$100,000 but less than
$250,000....................... 3.75 3.90 3.25
$250,000 but less than
$500,000....................... 2.75 2.83 2.25
$500,000 but less than
$1,000,000..................... 2.00 2.04 1.75
$1,000,000 or more*.............. * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to brokers, dealers or
financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million, plus 0.20% on the next $2 million and 0.08% on the excess
over $5 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to contingent
deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
26
<PAGE> 268
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the
27
<PAGE> 269
Distributor. The total sales charge for all other investments made from unit
trust distributions will be 1.00% of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as
28
<PAGE> 270
described herein under "Purchase of Shares -- Class A Shares -- Quantity
Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor
may pay brokers, dealers or financial intermediaries through which
purchases are made an amount up to 0.50% of the amount invested, over a
12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
(9) Participants in any 403(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: 1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust
29
<PAGE> 271
department, provided that the Fund's transfer agent receives federal funds for
the purchase by the close of business on the next business day following
acceptance of the order. An authorized broker, dealer or financial intermediary
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVE
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchases of CDSC Shares, all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents and
for selling such
30
<PAGE> 272
shares. The combination of the contingent deferred sales charge and the
distribution fees facilitates the ability of the Fund to sell such CDSC Shares
without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
31
<PAGE> 273
CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a contingent deferred sales charge at the rates set
forth below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------------------------------------------- -------------------
<S> <C>
First.................................................. 4.00%
Second................................................. 3.75%
Third.................................................. 3.50%
Fourth................................................. 2.50%
Fifth.................................................. 1.50%
Sixth.................................................. 1.00%
Seventh and after...................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services--Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
CONVERSION FEATURE. Seven years or ten years after the end of the month in
which a shareholder's order to purchase a Class B Share or Class C Share,
respectively, of the Fund was accepted, such share automatically will convert to
a Class A Share and no longer will be subject to the higher aggregate
distribution and service fees applicable to Class B Shares and Class C Shares.
The purpose of the conversion feature is to relieve the holders of Class B
Shares and Class C Shares that have been outstanding for a period of time
sufficient for the Distributor to have been compensated for distribution
expenses related to such shares from most of the burden of such
distribution-related expenses. The Fund does not expect to issue any share
certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of shares in the respective sub-account also
will convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
32
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the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different class of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different class of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
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instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
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SHAREHOLDER SERVICES
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The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the
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Fund. Such shares are acquired at net asset value (without sales charge) on the
record date of such dividend or distribution. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS. The investor may, on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
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No sales charge is imposed upon the exchange of Class B Shares or Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal
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<PAGE> 278
plan. This plan provides for the orderly use of the entire account, not only the
income but also the capital, if necessary. Each withdrawal constitutes a
redemption of shares on which taxable gain or loss will be recognized. The plan
holder may arrange for monthly, quarterly, semi-annual, or annual checks in any
amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing
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privilege may be terminated or suspended at any time by the Fund or State Street
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege. A "stop payment" system is not available on
these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a
broker-dealer; a credit union; a national securities exchange, registered
securities association or clearing agency; a savings and loan association; or a
federal savings bank. If certificates are held for the shares being redeemed,
such certificates must be endorsed for transfer or accompanied by an endorsed
stock power and sent with the redemption request. In the event the redemption
is requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for
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<PAGE> 280
shares redeemed (less any sales charge, if applicable) will ordinarily be made
by check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are
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<PAGE> 281
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
the shares to be redeemed have been recently purchased by check, ACCESS may
delay mailing a redemption check or wiring redemption proceeds until it confirms
that the purchase check has cleared, usually a period of up to 15 days. If an
account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next
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<PAGE> 282
determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
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THE DISTRIBUTION AND SERVICE PLANS
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The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
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Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1995, there were $578,078
and $1,856 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 3.43% and 0.40% of the
Fund's net assets attributable to
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Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
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DISTRIBUTIONS FROM THE FUND
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The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income and dividends, other ordinary income earned by
the Fund, less all expenses of the Fund attributable to the class of shares in
question. Net short-term capital gains, if any, may be distributed throughout
the year. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed, to the extent permitted
by applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement.
43
<PAGE> 285
Shares remain entitled to dividends through the day such shares are processed
for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder elects
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
FLORIDA TAXATION
The following Florida tax discussion is based on the advice of Squire, Sanders
& Dempsey, special counsel to the Fund for Florida tax matters, and reflects
applicable Florida tax laws as of the date of this Prospectus.
Under existing Florida law, shares of the Fund will not be subject to the
Florida intangible personal property tax for any year if, on the last business
day of the previous calendar year, the Fund's portfolio consisted solely of (1)
notes, bonds and other obligations issued by the State of Florida or its
municipalities, counties, and other taxing districts, or by the United States
Government and its agencies, or by the governments of Puerto Rico, Guam or the
U.S. Virgin Islands, or (2) other intangible personal property exempt from the
Florida intangible personal property tax. (FOR THIS PURPOSE, OBLIGATIONS ISSUED
BY A NONPROFIT CORPORATION FORMED UNDER THE GENERAL NONPROFIT CORPORATION LAW OF
A STATE ARE NOT EXEMPT FROM THE FLORIDA INTANGIBLE PERSONAL PROPERTY TAX EVEN IF
THEY ARE CONSIDERED FOR FEDERAL INCOME TAX PURPOSES TO BE OBLIGATIONS ISSUED "ON
BEHALF OF" A GOVERNMENTAL UNIT THE INTEREST ON WHICH IS EXEMPT FROM FEDERAL
INCOME TAX.) Shares of the Fund will generally be subject to the Florida
intangible personal property tax for any year if, on the last business day of
the previous calendar year, the Fund's portfolio consists of any asset that is
not exempt from the Florida intangible property tax.
The State of Florida and its political subdivisions do not impose income taxes
on individuals, and therefore individual shareholders of the Fund will not be
subject to a Florida income tax on distributions from the Fund or on gain from
the sale or other disposition of shares of the Fund.
44
<PAGE> 286
Corporations (and certain other entities treated as corporations under the
Florida Income Tax Code) that are subject to the Florida income tax will be
taxable on distributions from the Fund and on gain from the sale or other
disposition of shares of the Fund to the extent such income or gain is allocated
or apportioned to Florida. Accordingly, investment in shares of the Fund may not
be appropriate for such corporations.
The transfer of shares of the Fund will not be subject to the Florida
documentary stamp tax. Shares of the Fund will be included in assets subject to
Florida estate tax.
Under current Florida tax law, the Florida intangible personal property tax
rate is 0.20%. Shareholders subject to taxation in a state other than Florida
may realize a lower after-tax rate of return than Florida shareholders if the
dividends distributed by the Fund are not exempt from taxation in such other
state.
FEDERAL TAXATION
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.
The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. Similarly, the Fund will not be subject to federal
income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (which does not
include tax-exempt income) for such year and at least 98% of its capital gain
net income (the latter of which is generally computed on the basis of the
one-year period ending on October 31 of such year), plus any required
distribution amounts that were not distributed in previous taxable years. For
purposes of the excise tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.
45
<PAGE> 287
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid income and excise taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
DISTRIBUTIONS. If the Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, and if, at the close of each quarter
of the
46
<PAGE> 288
Fund's taxable year, at least 50% of the total value of the Fund's assets
consists of obligations the interest on which is exempt from federal income tax
("tax-exempt obligations"), the Fund will be qualified to pay exempt-interest
dividends to its shareholders to the extent of its tax-exempt interest income
(less expenses applicable thereto). Exempt-interest dividends are excludable
from a shareholder's gross income for federal income tax purposes, but may be
taxable distributions for state, local and other tax purposes. Exempt-interest
dividends are included, however, in determining what portion, if any, of a
person's social security and railroad retirement benefits will be includable in
gross income subject to federal income tax. Interest expense with respect to
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible to the extent that such interest relates to
exempt-interest dividends received from the Fund.
The Internal Revenue Service has publicly ruled that payments of insurance
proceeds representing interest on defaulted tax-exempt obligations are
excludable from gross income to the same extent that such payments would have
been excludable if they had been directly made by the issuer of the insured
obligations. Accordingly, insurance proceeds received by the Fund from any
insurer with whom the Fund maintains a policy described in this Prospectus will
be tax-exempt interest income of the Fund to the same extent as if such payments
were made by the issuer of the insured obligations, and will be includable by
the Fund in calculating their exempt-interest dividends. In the case of
non-appropriation by a political subdivision, however, there can be no assurance
that payments made by the insurers representing interest on a
"non-appropriation" lease obligation will be excludable from gross income for
federal income tax purposes and, therefore, includable by the Fund in
calculating its tax-exempt dividends.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividend"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such shareholders (assuming such shares are held as
a capital asset). It is not expected that any portion of the distributions from
the Fund will be eligible for the dividends received deduction for corporations.
The Fund will inform shareholders of the source and tax status of distributions
promptly after the close of each calendar year.
47
<PAGE> 289
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a measure of income that
includes interest on tax-exempt obligations exceeds the amount otherwise
determined to be the alternative minimum taxable income. Accordingly, investment
in the Fund may cause such shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 prior to the date of payment. In addition,
certain other distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid by the Fund (except for purposes of
the 4% excise tax) during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the
distribution is actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES. Redemption or sale of shares of the Fund will be a taxable
transaction for federal income tax purposes. Redeeming shareholders will
generally recognize gain or loss in an amount equal to the difference between
their basis in such redeemed shares of the Fund and the amount received. If such
shares are held as a capital asset, the gain or loss will be a capital gain or
loss and will generally be long-term if such shares have been held for more than
one year. Any loss realized on a taxable disposition of shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received with respect to such shares. If such loss is not entirely disallowed,
it will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
48
<PAGE> 290
GENERAL. The Florida and federal tax discussions set forth above are for
general information only. Prospective investors should consult their tax
advisers regarding the specific Florida and federal tax consequences of holding
and disposing of shares, as well as the effects of other state, local and
foreign tax laws and any proposed tax law changes.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
49
<PAGE> 291
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt Florida Insured
Tax Free Fund as a sub-trust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
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.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares 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
holders of Class B Shares and Class C Shares are likely to be lower than to
other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933, as amended. 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.
50
<PAGE> 292
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital
Florida Insured Tax Free Income Fund, One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
51
<PAGE> 293
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
FLORIDA INSURED TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Florida Insured Tax Free Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Florida Insured Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 294
------------------------------------------------------------------------------
FLORIDA INSURED
TAX FREE
INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
-------- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 295
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital New Jersey Tax Free Income Fund (the "Fund") is
a non-diversified mutual fund, organized as a separate series of Van Kampen
American Capital Tax Free Trust. The Fund's investment objective is to provide
investors a high level of current income exempt from federal income tax and New
Jersey gross income tax, consistent with preservation of capital. The Fund is
designed for investors who are residents of New Jersey for tax purposes. Under
normal market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a portfolio of New Jersey municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by Standard & Poor's Ratings Group
("S&P"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
Jersey municipal securities rated below investment grade (but not rated lower
than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO) and
unrated New Jersey municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
See "Municipal Securities." There is no assurance that the Fund will achieve its
investment objective.
(Continued on next page.)
------------------
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL (SM)
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 296
(Continued from previous page.)
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
(800) 421-5666.
2
<PAGE> 297
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 6
Annual Fund Operating Expenses and Example..................... 7
Financial Highlights........................................... 9
The Fund....................................................... 10
Investment Objective and Policies.............................. 10
Municipal Securities........................................... 12
Investment Practices........................................... 16
Special Considerations Regarding the Fund...................... 19
Investment Advisory Services................................... 21
Alternative Sales Arrangements................................. 23
Purchase of Shares............................................. 25
Shareholder Services........................................... 35
Redemption of Shares........................................... 39
The Distribution and Service Plans............................. 42
Distributions from the Fund.................................... 44
Tax Status..................................................... 45
Fund Performance............................................... 50
Description of Shares of the Fund.............................. 51
Additional Information......................................... 52
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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.
3
<PAGE> 298
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital New Jersey Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund, organized as a separate series of Van
Kampen American Capital Tax Free Trust. See "The Fund."
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors a
high level of current income exempt from federal income tax and New Jersey gross
income tax, consistent with preservation of capital. The Fund is designed for
investors who are residents of New Jersey for tax purposes.
INVESTMENT POLICIES. Under normal market conditions, the Fund seeks to achieve
its investment objective by investing at least 80% of its assets in a portfolio
of New Jersey municipal securities rated investment grade at the time of
investment. Investment grade securities are securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO"). Up to 20% of the Fund's
total assets may consist of New Jersey municipal securities rated below
investment grade (but not rated lower than B- by S&P, B3 by Moody's or an
equivalent rating by another NRSRO) and unrated New Jersey municipal securities
that the Fund's investment adviser believes are of comparable quality, which
involve special risk considerations. Up to 20% of the Fund's assets may be
invested in municipal securities that are subject to federal alternative minimum
tax. See "Investment Objective and Policies," "Municipal Securities" and
"Special Considerations Regarding the Fund."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
PURCHASE OF SHARES. Shares of the Fund are offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, and
through selected brokers and dealers. The offering price is the net asset value
per share next determined followed receipt of an order plus a sales charge
which, at the option of the investor, may be imposed at the time of purchase or
on a contingent deferred basis. Investors may elect to purchase Class A Shares,
Class B Shares or Class C Shares, each with different sales charges and
expenses. The minimum initial investment is $500 for each class of shares and
the minimum subsequent investment is $25 for each class of shares (or less as
described under "Purchase of Shares"). The different classes of shares permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. See "Purchase
of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
4
<PAGE> 299
SPECIAL RISK FACTORS. Up to 20% of the Fund's assets may consist of New Jersey
municipal securities rated below investment grade (but not rated lower than B-
by S&P, B3 by Moody's or an equivalent rating by another NRSRO) and in unrated
New Jersey municipal securities considered by the Adviser to be of comparable
quality. In addition, the Fund may invest up to 20% of its assets in certain
derivative securities such as inverse floaters. Investment in such lower grade
municipal securities and derivative securities involves significant risks.
Furthermore, under normal market conditions, the Fund will invest substantially
all of its assets in New Jersey municipal securities, and therefore it will be
more susceptible to factors adversely affecting issuers of New Jersey municipal
securities than a municipal securities fund that does not invest in New Jersey
municipal securities to this degree. There can be no assurance that the Fund
will achieve its objective. See "Special Considerations Regarding the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 300
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
the offering price).......... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the
offering price).............. None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of
the original purchase price
or redemption proceeds)...... None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed).................... None None None
Exchange fees.................. None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are subject to a substantially reduced or
no sales charge at the time of purchase, but a contingent deferred sales
charge of 1.00% may be imposed on redemptions made within one year of the
purchase. See "Purchase of Shares -- Deferred Sales Charge Alternatives --
Class A Shares of $1 million or more."
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
6
<PAGE> 301
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)(1)........................ 0.00% 0.00% 0.00%
12b-1 Fees (as a percentage of average daily
net assets)(1)(2)........................... 0.00% 0.75% 0.75%
Other Expenses(1) (as a percentage of average
daily net assets)........................... 0.27% 0.26% 0.25%
Total Expenses (as a percentage of average
daily net assets)(1)........................ 0.27% 1.01% 1.00%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include a waiver of $72,316 of "Management Fees" and assumption of
$196,794 of "Other Expenses" and "12b-1 Fees" by the Adviser. If the Adviser
did not waive fees for the fiscal year ending December 31, 1995, the
"Management Fees" would have been 0.60% for each class of shares, "12b-1
Fees" would have been 0.25% for Class A Shares and 1.00% each for Class B
Shares and Class C Shares, "Other Expenses" would have been 1.68% for Class
A Shares, 1.63% for Class B Shares and 1.63% for Class C Shares and "Total
Expenses" would have been 2.53% for Class A Shares, 3.23% for Class B Shares
and 3.23% for Class C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
7
<PAGE> 302
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.27% for Class
A Shares, 1.01% for Class B Shares and
1.00% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $50 $56 $62 $ 80
Class B Shares............................ $50 $67 $71 $ 93*
Class C Shares............................ $20 $32 $55 $ 122
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $50 $56 $62 $ 80
Class B Shares............................ $10 $32 $56 $ 93*
Class C Shares............................ $10 $32 $55 $ 122
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after seven years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amounts with respect to Class B Shares
of the Fund reflects the lower aggregate 12b-1 and service fees applicable to
such shares after conversion to Class A Shares. THE INFORMATION CONTAINED IN THE
ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more
complete description of such costs and expenses, see "Purchase of Shares,"
"Redemption of Shares," "Investment Advisory Services" and "The Distribution and
Service Plans."
8
<PAGE> 303
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout each
of the periods indicated. The financial highlights have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, for each of the
periods indicated and their report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------- ------------------------------
JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS)
YEAR ENDED TO YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.......................... $ 13.754 $14.300 $ 13.738 $14.300
------- ------- ------- -------
Net Investment Income........................................ .792 .295 .685 .253
Net Realized and Unrealized Gain/Loss on Investments......... 1.253 (.551) 1.260 (.563)
------- ------- ------- -------
Total from Investment Operations.............................. 2.045 (.256) 1.945 (.310)
------- ------- ------- -------
Less:
Distributions from and in Excess of Net Investment
Income(1).................................................. .799 .290 .692 .252
------- ------- ------- -------
Net Asset Value, End of the Period............................ $ 15.000 $13.754 $ 14.991 $13.738
======= ======= ======= =======
Total Return(2)............................................... 15.26% (1.81%)* 14.43% (2.16%)*
Net Assets at End of the Period (In millions)................. $ 5.8 $ 3.0 $ 8.2 $ 6.5
Ratio of Expenses to Average Net Assets(2) (annualized)....... .27% .17% 1.01% .93%
Ratio of Net Investment Income to Average Net Assets(2)
(annualized)................................................. 5.43% 5.16% 4.73% 4.38%
Portfolio Turnover............................................ 31.45% 11.00% 31.45% 11.00%
(1)See Note 1 to the Financial Statements.
(2)If certain expenses had not been waived, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets....................... 2.53% 3.17% 3.23% 3.89%
Ratio of Net Investment Income to Average Net Assets.......... 3.17% 2.17% 2.51% 1.41%
<CAPTION>
CLASS C SHARES
------------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period.......................... $ 13.753 $14.300
------- -------
Net Investment Income........................................ .706 .240
Net Realized and Unrealized Gain/Loss on Investments......... 1.233 (.535)
------- -------
Total from Investment Operations.............................. 1.939 (2.95)
------- -------
Less:
Distributions from and in Excess of Net Investment
Income(1).................................................. .692 .252
------- -------
Net Asset Value, End of the Period............................ $ 15.000 $13.753
======= =======
Total Return(2)............................................... 14.42% (2.09%)*
Net Assets at End of the Period (In millions)................. $ .5 $ .2
Ratio of Expenses to Average Net Assets(2) (annualized)....... 1.00% .91%
Ratio of Net Investment Income to Average Net Assets(2)
(annualized)................................................. 4.73% 4.39%
Portfolio Turnover............................................ 31.45% 11.00%
(1)See Note 1 to the Financial Statements.
(2)If certain expenses had not been waived, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets....................... 3.23% 3.85%
Ratio of Net Investment Income to Average Net Assets.......... 2.50% 1.46%
</TABLE>
Total Return does not reflect the effect of sales charges.
* Non-Annualized
See Financial Statements and Notes Thereto
9
<PAGE> 304
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital New Jersey Tax Free Income Fund (the "Fund") is a
non-diversified separate series of Van Kampen American Capital Tax Free Trust
(the "Trust"), an open-end management investment company, commonly known as a
"mutual fund," organized as a Delaware business trust. Mutual funds sell their
shares to investors and invest the proceeds in a portfolio of securities. A
mutual fund allows investors to pool their money with that of other investors in
order to obtain professional investment management. Mutual funds generally make
it possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to other mutual funds distributed by
Van Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to provide investors a high level of
current income exempt from federal income tax and New Jersey gross income tax,
consistent with preservation of capital. The Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval of the
holders of a majority of the Fund's outstanding voting securities, as defined in
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund is
designed for investors who are residents of New Jersey for tax purposes. 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.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in New Jersey municipal securities rated investment grade at the time of
investment. Investment grade securities are securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO") in the case of long-term
obligations, and have equivalent ratings in the case of short-term obligations.
According to published guidelines, securities rated BBB by S&P are regarded by
S&P as having an adequate capacity to pay interest and repay principal. Whereas
such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a
10
<PAGE> 305
weakened capacity to pay interest and repay principal for debt in this category
than in higher rated categories. According to published guidelines, securities
rated Baa by Moody's are considered by Moody's as medium grade obligations. Such
securities are, in the opinion of Moody's, neither highly protected nor poorly
secured. Interest payments and principal security appear to Moody's to be
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. In the opinion
of Moody's, they lack outstanding investment characteristics and in fact have
speculative characteristics as well. The Fund's policy with respect to ratings
is not a fundamental policy, and thus may be changed by the Trustees without
shareholder approval.
Up to 20% of the Fund's total assets may be invested in New Jersey municipal
securities rated below investment grade (but not rated below B- by S&P, B3 by
Moody's or an equivalent rating by another NRSRO) and unrated New Jersey
municipal securities that the Adviser considers to be of comparable quality to
such securities. According to published guidelines, securities rated below
investment grade are regarded by S&P, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While in the opinion of S&P such securities will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. According to
published guidelines, securities rated below investment grade are regarded by
Moody's as generally lacking characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the securities' contract over any long period of time may, in the opinion of
Moody's, be small. Debt securities rated below investment grade are commonly
referred to as "junk bonds." For a description of S&P's and Moody's ratings see
the Statement of Additional Information. From time to time the Fund temporarily
may also invest up to 10% of its assets in tax exempt money market funds. Such
instruments will be treated as investments in municipal securities.
The Adviser will buy and sell securities for the Fund's portfolio with a view
to seeking a high level of current income exempt from federal income tax and New
Jersey gross income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. As a result, the Fund will not necessarily invest in the highest
yielding New Jersey municipal securities permitted by its investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to undue risk. The potential for
realization of capital gains resulting from possible changes in interest rates
will not be a major consideration. Other than for tax purposes, frequency of
portfolio turnover generally will not be a limiting factor if the Fund considers
it advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate normally will be less than 200%. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expenses or dealer costs than a lower rate, which expenses and costs must be
borne by the Fund and its shareholders. High portfolio turnover may also result
in
11
<PAGE> 306
the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status" in
this Prospectus and "Investment Policies and Restrictions" in the Statement of
Additional Information.
At times, conditions in the markets for New Jersey municipal securities may,
in the Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may use alternative strategies primarily designed to reduce fluctuations
in the value of the Fund's assets. In implementing these "defensive" strategies,
the Fund may invest to a substantial degree in high-quality, short-term New
Jersey municipal obligations. If these high-quality, short-term New Jersey
municipal obligations are not available or, in the Adviser's judgment, do not
afford sufficient protection against adverse market conditions, the Fund may
invest in high-quality municipal securities of issuers other than issuers of New
Jersey municipal securities. Furthermore, if such high-quality municipal
securities are not available or, in the Adviser's judgment do not afford
sufficient protection against adverse market conditions, the Fund may invest in
taxable obligations. Such taxable obligations may include: obligations of the
U.S. Government, its agencies or instrumentalities; other debt securities rated
within the four highest categories by either S&P or Moody's (or comparably rated
by another NRSRO); commercial paper rated in the highest grade by either rating
service (or comparably rated by another NRSRO); certificates of deposit and
bankers' acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Adviser considers
consistent with such strategy. To the extent that the Fund invests a substantial
portion of its assets in municipal securities other than New Jersey municipal
securities or in taxable securities for temporary defensive purposes, the Fund
will not be invested in a manner primarily designed to achieve a high level of
current income exempt from federal income tax and New Jersey gross income tax.
In addition, under New Jersey tax law, to qualify as a "qualified investment
fund", at the close of each quarter the Fund must have not less than 80% of the
aggregate principal amount of all of its investments, excluding certain
investments, in New Jersey municipal securities, or any other obligations the
interest or gains on which is exempt from New Jersey gross income tax. See "Tax
Status -- New Jersey Taxation."
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Municipal securities are obligations issued by or on behalf of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel or other counsel to the issuer
of such securities is, at the time of issuance, exempt from federal income tax.
New Jersey municipal securities are municipal securities the interest on which,
in the opinion of bond counsel or other counsel to the issuers of such
securities, is at the time of issuance exempt from New Jersey gross income tax.
If it is determined that the interest on municipal
12
<PAGE> 307
securities is includable in gross income for federal income tax purposes or the
interest on New Jersey municipal securities is not exempt from New Jersey gross
income tax, the Fund may not qualify as a "qualified investment fund" under New
Jersey tax law. See "Tax Status -- New Jersey Taxation." Under normal market
conditions, at least 80% of the Fund's assets will be invested in New Jersey
municipal securities. The policy stated in the foregoing sentence is a
fundamental policy of the Fund and cannot be changed without approval of the
shareholders of the Fund. Up to 20% of the Fund's assets may be invested in
municipal securities that are subject to federal alternative minimum tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, municipal leases, custodial receipts, participation
certificates and derivative municipal securities the terms of which include
elements of, or are similar in effect to, certain Strategic Transactions (as
defined below) in which the Fund may engage. Variable rate securities bear rates
of interest that are adjusted periodically according to formulae intended to
reflect market rates of interest. The Fund may also invest in derivative
variable rate securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
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. The Fund will not invest more than
20% of its total assets in securities whose rates vary inversely with changes in
market rates of interest.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities. Certain municipal lease obligations may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities
13
<PAGE> 308
dealers or banks and evidence ownership of future interest payments, principal
payments or both on certain municipal securities. Participation certificates are
obligations issued by state or local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract.
Municipal securities may not be backed by the faith, credit and taxing power of
the issuer. Other than as set forth above, there is no limitation with respect
to the amount of the Fund's assets that may be invested in the foregoing types
of municipal securities. Certain of the municipal securities in which the Fund
may invest represent relatively recent innovations in the municipal securities
markets and the markets for such securities may be less developed than the
market for conventional fixed rate municipal securities. A more detailed
description of the types of municipal securities in which the Fund may invest is
included in the Statement of Additional Information.
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 invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments. The net asset value of the
Fund will change with changes in the value of its portfolio securities. Because
the Fund will invest primarily in fixed income municipal securities, the net
asset value of the Fund can be expected to change as general levels of interest
rates fluctuate. When interest rates decline, the value of a portfolio invested
in fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. The prices of longer term
municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Although at least 80% of the municipal securities in which the Fund may invest
will be 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 securities experiencing non-payment and a potential decrease in the
net asset value of the Fund.
Up to 20% of the Fund's assets may be invested in municipal securities that
are subject to federal alternative minimum tax. The Fund may not be a suitable
investment for investors who are already subject to the federal alternative
minimum tax or who would become subject to the federal alternative minimum tax
as a result of an investment in the Fund. In addition, income earned or deemed
to be earned
14
<PAGE> 309
with respect to the Fund's Strategic Transactions, if any, will be taxable. See
"Tax Status."
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in New Jersey municipal securities rated below investment grade (but not
rated lower than B- by S&P, B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated municipal securities considered by the Adviser to be of
comparable quality to such securities. Higher yields are generally available
from municipal securities of such grade. With respect to such 20% of the Fund's
total assets, the Fund has not established any limit on the percentage of its
portfolio which may be invested in securities in any one rating category or
comparable unrated securities.
Investors should carefully consider the risks of owning shares of an
investment company which invests in lower grade municipal securities before
making an investment in the Fund. The higher yield on certain securities held by
the Fund reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. See "Special
Considerations Regarding the Fund."
The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
See "Special Considerations Regarding the Fund."
15
<PAGE> 310
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in New Jersey
municipal securities for purposes of the Fund's 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Under current New Jersey
tax law, the Fund may purchase and sell exchange listed and over-the-counter put
and call options and purchase and sell financial futures. See "Tax Status -- New
Jersey Taxation." The Fund also reserves the right to engage in swaps, caps,
floors or collars. However, current New Jersey tax law may limit the Fund's
ability to enter into such transactions. Strategic Transactions may be used to
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets, to protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
16
<PAGE> 311
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
Income earned or deemed to be earned by the Fund from, among other things, its
Strategic Transactions and temporary defensive strategies, if any, will
generally be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to substantial legal or contractual restrictions on resale and
securities that are not
17
<PAGE> 312
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.
OTHER PRACTICES. The Fund may borrow amounts up to 5% of its net assets in
order to pay for redemptions when liquidation of portfolio securities is
considered disadvantageous or inconvenient and may pledge up to 10% of its net
assets to secure such borrowings.
Under normal market conditions, the fund will invest substantially all of its
assets in New Jersey municipal securities. The Fund generally will not invest
more than 25% of its total assets in any industry. Governmental issuers of
municipal securities are not considered part of any "industry." However,
municipal securities backed only by the assets and revenues of nongovernmental
users may for this purpose be deemed to be issued by such nongovernmental users,
and the 25% limitation would apply to such obligations. It is therefore possible
that the Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or airport revenue
obligations if the Adviser determines that the yields available from obligations
in a particular segment of the market justifies the additional risks associated
with a large investment in such segment. Although such obligations could be
supported by the credit of governmental users, or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such a market segment.
From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of New Jersey municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.
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<PAGE> 313
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The income securities in which the Fund invests are
traded principally in the over-the-counter market. In the over-the-counter
market, securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
- ------------------------------------------------------------------------------
GENERAL. In normal circumstances, the Fund may invest up to 20% of its total
assets in New Jersey municipal securities rated below investment grade (but not
lower than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO) or
in unrated New Jersey municipal securities considered by the Adviser to be of
comparable quality to such securities. Investment in such lower grade municipal
securities involves special risks as compared with investment in higher grade
municipal securities. The market for lower grade municipal securities is
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<PAGE> 314
considered to be less liquid than the market for investment grade municipal
securities which may adversely affect the ability of the Fund to dispose of such
securities in a timely manner at a price which reflects the value of such
security in the Adviser's judgement. The market price for less liquid securities
tends to be more volatile than the market price for more liquid securities.
Illiquid securities and the absence of readily available market quotations with
respect thereto may make the Adviser's valuation of such securities more
difficult, and the Adviser's judgment may play a greater role in the valuation
of the Fund's securities. Lower grade municipal securities generally involve
greater credit risk than higher grade municipal securities and are more
sensitive to adverse economic changes, significant increases in interest rates
and individual issuer developments. Because issuers of lower grade municipal
securities frequently choose not to seek a rating of their municipal securities,
the Fund will rely more heavily on the Adviser's ability to determine the
relative investment quality of such securities than if the Fund invested
exclusively in higher grade municipal securities. The Fund may, if deemed
appropriate by the Adviser, retain a security whose rating has been downgraded
below B- by S&P, below B3 by Moody's or an equivalent rating by another NRSRO,
or whose rating has been withdrawn. More detailed information concerning the
risks associated with instruments in lower grade municipal securities is
included in the Fund's Statement of Additional Information.
The Fund may invest up to 20% of its total assets in derivative variable rate
securities such as inverse floaters whose rates of interest vary inversely with
changes in market rates of interest. When market rates of interest decrease, the
change in value of such securities will have a positive effect on the net asset
value of the Fund and when market rates of interest increase, the change in
value of such securities will have a negative effect on the net asset value of
the Fund. Investment in such securities involve special risks as compared to a
fixed rate municipal security. The extent of increases and decreases in the
value of inverse floaters and the corresponding change to per share net asset
value of the Fund 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. The markets for inverse
variable rate securities may be less developed than the market for conventional
fixed rate municipal securities.
SPECIAL CONSIDERATIONS REGARDING NEW JERSEY MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of New Jersey municipal securities. New Jersey's economic base is
diversified, consisting of a variety of manufacturing, construction and service
industries, supplemented by rural areas with selective commercial agriculture.
By the beginning of the national recession in 1990, construction activity had
already been declining in New Jersey for nearly two years. The onset of
recession caused an acceleration of New Jersey's job losses in construction and
manufacturing, as well as an employment downturn in such previously growing
sectors as wholesale trade, retail trade, finance, utilities and trucking and
warehousing. Reflecting the downturn, the rate of unemployment in the State rose
from a peacetime low of 3.6%
20
<PAGE> 315
during the first quarter of 1989 to a recessionary peak of 8.4% during 1992.
Since then, the unemployment rate fell to an average of 6.4% during the first
ten months of 1995.
New Jersey operates under an annual budget which is formulated and submitted
for legislative approval by the Governor by the third Tuesday following the
first meeting of the State Legislature in each year. After a process of
legislative committee review, the budget, in the form of an appropriations bill,
must be approved by the Senate and Assembly and must be approved and signed by
the Governor before any expenditure may be made in a fiscal year. At the time of
signing the bill, the Governor may revise the estimate of anticipated revenues
and may delete or reduce appropriation items contained in the bill. Like any
gubernatorial veto, that action may be reversed by a two-thirds vote of each
House of the New Jersey Legislature. In addition to anticipated revenues, the
appropriations act also provides for the appropriation of non-budgeted revenue
to the extent such revenue may be received and permits the corresponding
increase of appropriation balances from which expenditures may be made. New
Jersey operates on a fiscal year beginning July 1 and ending June 30.
On July 3, 1991, S&P downgraded New Jersey general obligation bonds to "AA+."
On August 26, 1992, Moody's downgraded New Jersey general obligation bonds to
"Aa1." The issuance of the $59,000,000 State of New Jersey General Obligation
Bonds on November 23, 1994, was rated AA+ by S&P and Aa1 by Moody's. As of the
date this Prospectus was completed, the State of New Jersey was expected to sell
general obligation debt on or about May 1, 1996. Sometime prior to this date,
the applicable credit rating agencies are anticipated to issue updated credit
ratings for the State of New Jersey. Local municipalities issuing New Jersey
municipal securities, although impacted in general by the economic condition of
the State, have credit ratings that are determined with reference to the
economic condition of such local municipalities.
Although revenue obligations of the State of New Jersey or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
More detailed information concerning New Jersey municipal securities and the
State of New Jersey is included in the Statement of Additional Information.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American
21
<PAGE> 316
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 more than $50 billion
under management or supervision. Van Kampen American Capital's more than 40
open-end and 38 closed-end funds and more than 2,800 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
American Capital Distributors, Inc., the distributor of the Fund and sponsor of
the funds mentioned above, is 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 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.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------------------------------------- ---------------
<S> <C>
First $500 million..................................... 0.600 of 1.00%
Over $500 million...................................... 0.500 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the 1940 Act, of the Adviser, the Distributor
or Van Kampen American Capital), the charges and expenses of independent
accountants, legal counsel, any transfer or dividend disbursing agent and the
custodian (including fees for safekeeping of securities), costs of calculating
net asset value, costs of acquiring
22
<PAGE> 317
and disposing of portfolio securities, interest (if any) on obligations incurred
by the Fund, costs of share certificates, membership dues in the Investment
Company Institute or any similar organization, reports and notices to
shareholders, costs of registering shares of the Fund under the federal
securities laws, miscellaneous expenses and all taxes and fees to federal, state
or other governmental agencies. The Adviser reserves the right in its sole
discretion from time-to-time to waive all or a portion of its management fee or
to reimburse the Fund for all or a portion of its other expenses.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
preclearance and other procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson has been employed by the Adviser since April 1989. Timothy D. Haney,
Assistant Vice President and municipal portfolio manager of the Adviser, has
been primarily responsible for the day-to-day management of the Fund's portfolio
since August 1995. From 1992 to 1995 Mr. Haney was employed by the Distributor
as a unit trust bond buyer. Prior to 1992, Mr. Haney was employed by the Adviser
as a municipal analyst.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
23
<PAGE> 318
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares or Class C Shares. If
such an investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares. Investors must weigh the benefits of deferring
the sales charge and having all of their funds invested against the higher
aggregate distribution and service fee applicable to Class B Shares and Class C
Shares (discussed below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Generally, a class of shares subject
to a higher ongoing distribution fee and service fee or subject to the
conversion feature have a higher expense ratio and pay lower dividends than a
class of shares subject to a lower ongoing distribution and service fee or not
subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares,
24
<PAGE> 319
which expenses typically will be higher with respect to classes of shares
subject to the conversion feature; (ii) printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxy statements to current shareholders of a specific class; (iii)
Securities and Exchange Commission (the "SEC") registration fees incurred by a
class of shares; (iv) the expense of administrative personnel and services as
required to support the shareholders of a specific class; (v) Trustees' fees or
expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares will be
limited to the extent necessary to preserve the Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the public on a continuous basis
through Van Kampen American Capital Distributors, Inc. (the "Distributor"), as
principal underwriter, which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares also are offered through members of the National
Association of Securities Dealers, Inc. ("NASD") acting as securities dealers
("dealers") and through NASD members acting as brokers for investors ("brokers")
or eligible non-NASD members acting as agents for investors ("financial
intermediaries"). The Fund reserves the right to suspend or terminate the
continuous public offering of its shares at any time and without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or directly with the Distributor plus
any applicable sales charge. Sales personnel or brokers, dealers and financial
intermediaries distributing the Fund's shares may receive different compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
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<PAGE> 320
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. Such payments to
brokers, dealers and financial intermediaries for sales contests, other sales
programs and seminars are made by the Distributor out of its own assets and not
out of the assets of the Fund. These programs will not change the price an
investor pays for shares or the amount that the Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
dealers who receive 90% or more of the sales charge may be deemed to be
"underwriters" as that term is defined in the Securities Act of 1933, as
amended.
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<PAGE> 321
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
----------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000............... 4.75% 4.99% 4.25%
$100,000 but less than
$250,000....................... 3.75 3.90 3.25
$250,000 but less than
$500,000....................... 2.75 2.83 2.25
$500,000 but less than
$1,000,000..................... 2.00 2.04 1.75
$1,000,000 or more*.............. * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to brokers, dealers or
financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million, plus 0.20% on the next $2 million and 0.08% on the excess
over $5 million. See "Purchase of Shares -- Deferred Sales Charge
Alternatives" for additional information with respect to contingent
deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
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<PAGE> 322
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the
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Distributor. The total sales charge for all other investments made from unit
trust distributions will be 1.00% of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as
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described herein under "Purchase of Shares -- Class A Shares -- Quantity
Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor
may pay brokers, dealers or financial intermediaries through which
purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
(9) Participants in any 403(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: 1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust
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department, provided that the Fund's transfer agent receives federal funds for
the purchase by the close of business on the next business day following
acceptance of the order. An authorized broker, dealer or financial intermediary
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVE
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase price. In addition, no contingent deferred sales
charge will be assessed on CDSC Shares derived from reinvestment of dividends or
capital gains distributions. Solely for purposes of determining the number of
years from the time of any payment for the purchases of CDSC Shares, all
payments during a month will be aggregated and deemed to have been made on the
last day of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents and
for selling such
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shares. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell such CDSC Shares
without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
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<PAGE> 327
CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a contingent deferred sales charge at the rates set
forth below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ----------------------------------------------------- ---------------------
<S> <C>
First.......................................... 4.00%
Second......................................... 3.75%
Third.......................................... 3.50%
Fourth......................................... 2.50%
Fifth.......................................... 1.50%
Sixth.......................................... 1.00%
Seventh and after.............................. 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
CONVERSION FEATURE. Seven years or ten years after the end of the month in
which a shareholder's order to purchase a Class B Share or Class C Share,
respectively, of the Fund was accepted, such share automatically will convert to
a Class A Share and no longer will be subject to the higher aggregate
distribution and service fees applicable to Class B Shares and Class C Shares.
The purpose of the conversion feature is to relieve the holders of Class B
Shares and Class C Shares that have been outstanding for a period of time
sufficient for the Distributor to have been compensated for distribution
expenses related to such shares from most of the burden of such
distribution-related expenses. The Fund does not expect to issue any share
certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of the shares in the respective sub-account
also will convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
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<PAGE> 328
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fees and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur, and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different class of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different class of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
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<PAGE> 329
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
- ------------------------------------------------------------------------------
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. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the
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<PAGE> 330
Fund. Such shares are acquired at net asset value (without sales charge) on the
record date of such dividend or distribution. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS. The investor may, on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
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<PAGE> 331
No sales charge is imposed upon the exchange of a Class B Shares or Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal
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<PAGE> 332
plan. This plan provides for the orderly use of the entire account, not only the
income but also the capital, if necessary. Each withdrawal constitutes a
redemption of shares on which taxable gain or loss will be recognized. The plan
holder may arrange for monthly, quarterly, semi-annual, or annual checks in any
amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing
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<PAGE> 333
privilege may be terminated or suspended at any time by the Fund or State Street
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege. A "stop payment" system is not available on
these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for
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shares redeemed (less any sales charge, if applicable) will ordinarily be made
by check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are
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available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
the shares to be redeemed have been recently purchased by check, ACCESS may
delay mailing a redemption check or wiring redemption proceeds until it confirms
that the purchase check has cleared, usually a period of up to 15 days. If an
account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next
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<PAGE> 336
determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
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THE DISTRIBUTION AND SERVICE PLANS
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The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
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<PAGE> 337
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1995, there were $320,265
and $3,578 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares,
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respectively, representing 3.93% and 0.77% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income, dividends, and other ordinary income earned by
the Fund, less all expenses of the Fund attributable to the class of shares in
question. Net short-term capital gains, if any, may be distributed throughout
the year. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed, to the extent permitted
by applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent
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receives payment for the shares either through a fed wire or NSCC settlement.
Shares remain entitled to dividends through the day such shares are processed
for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
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TAX STATUS
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NEW JERSEY TAXATION
The following New Jersey income tax discussion is based on the advice of
Crummy, Del Deo, Dolan, Griffinger & Vecchione, special New Jersey tax counsel
to the Fund, and reflects applicable New Jersey tax laws as of the date hereof.
Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax will not be required to include in
their New Jersey gross income distributions from the Fund which the Fund clearly
identifies as directly attributable to interest or gains from New Jersey
municipal securities, obligations of the United States or any other obligations,
the interest and gain on which is exempt from New Jersey Gross Income Tax under
New Jersey law or federal law, provided that the Fund qualifies as a "qualified
investment fund."
The Fund will qualify as a "qualified investment fund" if, for any calendar
year in which a distribution is paid: (1) the Fund has no investments, other
than interest-bearing obligations, obligations issued at a discount and cash and
cash items, including receivables and financial options, futures, forward
contracts, or other similar financial instruments related to interest-bearing
obligations, obligations issued at a discount or bond indexes related thereto;
(2) at the close of each quarter of the taxable year the Fund has not less than
80% of the aggregate principal amount of all of its investments (excluding
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto to the extent
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<PAGE> 340
such instruments are authorized by Section 851(b) of the Internal Revenue Code
of 1986, cash and cash items, which cash items shall include receivables) in New
Jersey municipal securities, or any other obligations, including United States
obligations, the interest or gains on which is exempt from New Jersey Gross
Income Tax pursuant to New Jersey law or federal law; (3) the Fund does not
engage in any prohibited Strategic Transactions (see "Investment Practices");
and (4) the Fund satisfies the certification and reporting requirements imposed
by regulations promulgated by the New Jersey Division of Taxation. The Fund
intends to so qualify. The Fund must certify annually on or before February 15
to the New Jersey Division of Taxation that for the preceding calendar year the
Fund is a "qualified investment fund." The Fund must also advise the Division of
Taxation as to amounts distributed for the preceding calendar year to
shareholders from income or gain derived from New Jersey and federal
obligations. The Fund must also advise its shareholders on or before February 15
of each calendar year that its distributions qualify for exclusion pursuant to
New Jersey law regarding qualified investment funds.
Distributions to individual shareholders, including trusts and estates, who
are subject to the New Jersey Gross Income Tax, attributable to interest or
gains on municipal obligations issued by states other than New Jersey, including
municipalities or authorities in such other states, or any other obligations the
interest on which is not exempt from New Jersey Gross Income Tax pursuant to New
Jersey law or federal law, will be included as New Jersey gross income for
purposes of calculating the New Jersey Gross Income Tax.
Individual shareholders of the Fund, including trusts and estates, who are
subject to the New Jersey Gross Income Tax, will not be required to include in
gross income net gains attributable to the sale of shares provided that the Fund
qualifies as a "qualified investment fund." Any loss realized on such sale may
not be utilized to offset gains realized by such shareholder on the sale of
assets the gain on which is subject to the New Jersey Gross Income Tax.
If an individual holder of shares dies a domiciliary of New Jersey, New Jersey
Inheritance Tax and New Jersey Estate Tax may be imposed as a result of the
ownership of such shares.
If a shareholder is a corporation subject to the New Jersey Corporation
Business Tax or the New Jersey Corporation Income Tax, distributions of interest
or gains, or both, from the Fund will be includable in its entire net income for
purposes of the New Jersey Corporation Business Tax or New Jersey Corporation
Income Tax, less any interest expense incurred to carry such investment to the
extent such interest expense has not been deducted in computing federal taxable
income. Net gains derived by such corporation on the sale of its shares will be
included in its entire net income for purposes of the New Jersey Corporation
Business Tax or New Jersey Corporation Income Tax.
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<PAGE> 341
New Jersey S corporations that are shareholders of the Fund generally will be
subject to the Corporation Business Tax at a rate of 2.63% of their entire net
income. New Jersey S corporations with entire net income of $100,000 or less for
tax years beginning on or after July 1, 1996 will be subject to tax at a rate of
1.13%. However, New Jersey S corporations that are taxed under certain
provisions of federal tax law will be subject to the Corporation Business Tax at
a rate of 9.0% of their entire net income. Entire net income will include
distributions of the Fund and gains on the sale of shares of the Fund.
The foregoing is a general, abbreviated summary of certain of the provisions
of New Jersey law presently in effect as they directly govern the taxation of
shareholders of the Fund. The provisions are subject to change by legislative or
administrative action, and any such change may be retroactive with respect to
Fund transactions.
FEDERAL TAXATION
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable federal tax laws as of the
date of this Prospectus.
The Fund intends to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain, which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. Similarly, the Fund will not be subject to federal
income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (which does not
include tax-exempt income) for such year and at least 98% of its capital gain
net income (the latter of which is generally computed on the basis of the
one-year period ending on October 31 of such year), plus any required
distribution amounts that were not distributed in previous taxable years. For
purposes of the excise tax, any ordinary income or capital gain net income
retained by, and subject to federal income tax in the hands of, the Fund will be
treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
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<PAGE> 342
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid income and excise taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
DISTRIBUTIONS. If the Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, and if, at the close of each quarter
of the Fund's taxable year, at least 50% of the total value of the Fund's assets
consists of obligations the interest on which is exempt from federal income tax
("tax-exempt obligations"), the Fund will be qualified to pay exempt-interest
dividends to its
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<PAGE> 343
shareholders to the extent of its tax-exempt interest income (less expenses
applicable thereto). Exempt-interest dividends are excludable from a
shareholder's gross income for federal income tax purposes, but may be taxable
distributions for state, local and other tax purposes. Exempt-interest dividends
are included, however, in determining what portion, if any, of a person's social
security and railroad retirement benefits will be includable in gross income
subject to federal income tax. Interest expense with respect to indebtedness
incurred or continued by a shareholder to purchase or carry shares of the Fund
is not deductible to the extent that such interest relates to exempt-interest
dividends received from the Fund.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gain
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a market discount will
be treated as ordinary income rather than capital gain. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such shareholders (assuming such shares are held as
a capital asset). It is not expected that any portion of the distributions from
the Fund will be eligible for the dividends received deduction for corporations.
The Fund will inform shareholders of the source and tax status of distributions
promptly after the close of each calendar year.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a measure of income that
includes interest on tax-exempt obligations exceeds the amount otherwise
determined to be the alternative minimum taxable income. Accordingly, investment
in the Fund may cause such shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on
49
<PAGE> 344
the December 31 prior to the date of payment. In addition, certain other
distributions made after the close of a taxable year of the Fund may be "spilled
back" and treated as paid by the Fund (except for purposes of the 4% excise tax)
during such taxable year. In such case, shareholders will be treated as having
received such dividends in the taxable year in which the distribution is
actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES. Redemption or sale of shares of the Fund will be a taxable
transaction for federal income tax purposes. Redeeming shareholders will
generally recognize gain or loss in an amount equal to the difference between
their basis in such redeemed shares of the Fund and the amount received. If such
shares are held as a capital asset, the gain or loss will be a capital gain or
loss and will generally be long-term if such shares have been held for more than
one year. Any loss realized on a taxable disposition of shares held for six
months or less will be disallowed to the extent of any exempt-interest dividends
received with respect to such shares. If such loss is not entirely disallowed,
it will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
GENERAL. The New Jersey and federal income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisers regarding the specific New Jersey and federal tax consequences of
holding and disposing of shares, as well as the effects of other state, local
and foreign tax laws and any proposed tax law changes.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
50
<PAGE> 345
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt New Jersey Tax
Free Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. The Fund was reorganized as a series of the Trust
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.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
51
<PAGE> 346
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares 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
holders of Class B Shares and Class C Shares are likely to be lower than to
other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933, as amended. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital New
Jersey Tax Free Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois
60181, Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
52
<PAGE> 347
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
New Jersey Tax Free Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
New Jersey Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 348
------------------------------------------------------------------------------
NEW JERSEY TAX FREE
INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 349
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
NEW YORK TAX FREE INCOME FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital New York Tax Free Income Fund (the "Fund") is a
non-diversified mutual fund, organized as a separate series of Van Kampen
American Capital Tax Free Trust. The Fund's investment objective is to provide
investors a high level of current income exempt from federal, New York State and
New York City income taxes, consistent with preservation of capital. The Fund is
designed for investors who are residents of New York for tax purposes. Under
normal market conditions, the Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a portfolio of New York municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by Standard & Poor's Ratings Group
("S&P"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical ratings
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
York municipal securities rated below investment grade (but not rated lower than
B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO) and unrated
(Continued on next page.)
------------------
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
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunications
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 350
(Continued from previous page.)
New York municipal securities believed by the Fund's investment adviser to be of
comparable quality, which involve special risk considerations. Municipal
securities in which the Fund may invest include conventional fixed-rate
municipal securities, variable rate municipal securities and other types of
municipal securities described herein. See "Municipal Securities." There is no
assurance that the Fund will achieve its investment objective.
The investment adviser for the Fund is Van Kampen American Capital Investment
Advisory Corp. This Prospectus sets forth the information about the Fund that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
(800) 421-5666.
2
<PAGE> 351
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................... 4
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expenses and Example....................... 7
Financial Highlights............................................. 9
The Fund......................................................... 10
Investment Objective and Policies................................ 10
Municipal Securities............................................. 12
Investment Practices............................................. 15
Special Considerations Regarding the Fund........................ 19
Investment Advisory Services..................................... 21
Alternative Sales Arrangements................................... 22
Purchase of Shares............................................... 24
Shareholder Services............................................. 34
Redemption of Shares............................................. 38
The Distribution and Service Plans............................... 41
Distributions from the Fund...................................... 43
Tax Status....................................................... 44
Fund Performance................................................. 48
Description of Shares of the Fund................................ 49
Additional Information........................................... 50
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY 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.
3
<PAGE> 352
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital New York Tax Free Income Fund (the
"Fund") is a non-diversified mutual fund organized as a separate series of Van
Kampen American Capital Tax Free Trust (the "Trust").
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors a
high level of current income exempt from federal, New York State and New York
City income taxes, consistent with preservation of capital.
INVESTMENT POLICIES. The Fund is designed for investors who are residents of
New York for tax purposes. Under normal market conditions, the Fund seeks to
achieve its investment objective by investing at least 80% of its assets in a
portfolio of New York municipal securities rated investment grade at the time of
investment. Investment grade securities are securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO"). Up to 20% of the Fund's
total assets may consist of New York municipal securities rated below investment
grade (but not rated lower than B- by S&P, B3 by Moody's or an equivalent rating
by another NRSRO) and unrated New York municipal securities that the Fund's
investment adviser believes are of comparable quality, which involve special
risk considerations. Up to 20% of the Fund's assets may be invested in municipal
securities that are subject to federal alternative minimum tax. See "Investment
Objective and Policies," "Municipal Securities" and "Special Considerations
Regarding the Fund."
INVESTMENT RESULTS. The investment results of the Fund are shown in table of
"Financial Highlights".
PURCHASE OF SHARES. Shares of the Fund are offered through Van Kampen American
Capital Distributors, Inc. (the "Distributor"), as principal underwriter, and
through selected brokers and dealers. The offering price is the net asset value
per share next determined following receipt plus a sales charge which, at the
option of the investor, may be imposed at the time of purchase or on a
contingent deferred basis. Investors may elect to purchase Class A Shares, Class
B Shares or Class C Shares, each with different sales charges and expenses. The
minimum initial investment is $500 for each class of shares and the minimum for
each subsequent investment is $25 for each class of shares (or less as described
under "Purchase of Shares"). The different classes of shares permit an investor
to choose the method of purchasing shares that is more beneficial to the
investor, taking into account the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. See "Purchase of
Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
4
<PAGE> 353
SPECIAL RISK FACTORS. Up to 20% of the Fund's assets may consist of New York
securities rated below investment grade (but not rated lower than B- by S&P, B3
by Moody's or an equivalent rating by another NRSRO) and unrated New York
municipal securities considered by the Adviser to be of comparable quality. In
addition, the Fund may invest up to 20% of its assets in certain derivative
securities such as inverse floaters. Investment in such lower grade New York
municipal securities and derivative securities involves significant risks.
Furthermore, under normal market conditions, the Fund will invest substantially
all of its assets in New York municipal securities, and therefore it will be
more susceptible to factors adversely affecting issuers of New York municipal
securities than a municipal securities fund that does not invest in New York
municipal securities to this degree. There can be no assurance that the Fund
will achieve its objective. See "Special Considerations Regarding the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 354
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
the offering price)........... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of the offering
price)........................ None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of
the original purchase price or
redemption proceeds).......... None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a percentage
of amount redeemed)............. None None None
Exchange fees................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchases
of Shares -- Deferred Sales Charge Alternative -- Class A Shares of $1
million or more".
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
6
<PAGE> 355
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)(1).......................... 0.00% 0.00% 0.00%
12b-1 Fees (as a percentage of average daily net
assets)(1)(2)................................. 0.00% 0.75% 0.75%
Other Expenses (as a percentage of average daily
net assets)(1)................................ 0.21% 0.18% 0.23%
Total Expenses (as a percentage of average daily
net assets)(1)................................ 0.21% 0.93% 0.98%
</TABLE>
- ------------------------------------------------------------------------------
(1) Expenses include a waiver of $81,041 of "Management Fees" and assumption of
$173,563 of "12b-1 Fees" and "Other Expenses" by the Adviser. If the Adviser
did not waive fees for the fiscal year ending December 31, 1995, the
"Management Fees" would have been 0.60% for each class of shares, "12b-1
Fees" would have been 0.25% for Class A Shares and 1.00% each for Class B
Shares and Class C Shares, "Other Expenses" would have been 1.25% for Class
A Shares, 1.22% for Class B Shares and 1.26% for Class C Shares and "Total
Expenses" would have been 2.10% for Class A Shares, 2.82% for Class B Shares
and 2.86% for Class C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
7
<PAGE> 356
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.21% for
Class A Shares, 0.93% for Class B
Shares and 0.98% for Class C Shares,
(ii) 5% annual return and (iii)
redemption at the end of each time
period:
Class A Shares......................... $50 $54 $59 $ 73
Class B Shares......................... $49 $65 $66 $ 84*
Class C Shares......................... $20 $31 $54 $ 120
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares......................... $50 $54 $59 $ 73
Class B Shares......................... $ 7 $30 $51 $ 84*
Class C Shares......................... $10 $31 $54 $ 120
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after seven years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expense" table. The ten year amount with respect to Class B Shares of
the Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A Shares. THE INFORMATION CONTAINED IN THE
ABOVE TABLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES
AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more
complete description of such costs and expenses, see "Purchase of Shares,"
"Redemption of Shares," "Investment Advisory Services" and "The Distribution and
Service Plans."
8
<PAGE> 357
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout each
of the periods indicated. The financial highlights have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, for each of the
periods indicated and their report thereon appears in the Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------- ----------------------------
JULY 29, 1994 JULY 29, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS)
YEAR ENDED TO YEAR ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................................. $ 13.579 $14.300 $ 13.578 $14.300
------ ------ ------ ------
Net Investment Income................................................ .821 .302 .713 .263
Net Realized and Unrealized Gain/Loss on Investments................. 1.476 (.722) 1.476 (.722)
------ ------ ------ ------
Total from Investment Operations...................................... 2.297 (.420) 2.189 (.459)
------ ------ ------ ------
Less Distributions from and in excess of Net Investment Income........ .828 .301 .721 .263
------ ------ ------ ------
Net Asset Value, End of Period........................................ $ 15.048 $13.579 $ 15.046 $13.578
============ =============== ============ ==============
Total Return(1)....................................................... 17.33% (2.93%)* 16.47% (3.20%)*
Net Assets at End of Period (in millions)............................. $ 5.4 $ 2.9 $ 9.7 $ 8.1
Ratio of Expenses to Average Net Assets(1) (annualized)............... .21% .26% .93% .96%
Ratio of Net Investment Income to Average Net Assets(1)
(annualized)......................................................... 5.63% 5.27% 4.93% 4.58%
Portfolio Turnover.................................................... 51.00% 68.11% 51.00% 68.11%
<CAPTION>
CLASS C SHARES
----------------------------
JULY 29, 1994
(COMMENCEMENT
OF INVESTMENT
OPERATIONS)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1995 1994
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period.................................. $ 13.579 $14.300
------ ------
Net Investment Income................................................ .711 .267
Net Realized and Unrealized Gain/Loss on Investments................. 1.472 (.725)
------ ------
Total from Investment Operations...................................... 2.183 (.458)
------ ------
Less Distributions from and in excess of Net Investment Income........ .721 .263
------ ------
Net Asset Value, End of Period........................................ $ 15.041 $13.579
============ ===============
Total Return(1)....................................................... 16.39% (3.20%)*
Net Assets at End of Period (in millions)............................. $ .4 $ .2
Ratio of Expenses to Average Net Assets(1) (annualized)............... .98% .96%
Ratio of Net Investment Income to Average Net Assets(1)
(annualized)......................................................... 4.81% 4.58%
Portfolio Turnover.................................................... 51.00% 68.11%
</TABLE>
- ----------------
(1) If certain expenses had not been waived or assumed by the investment
adviser, total return would have been lower and the ratios would have been
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets (annualized)................ 2.10% 2.73% 2.82% 3.42%
Ratio of Net Investment Income to Average Net Assets (annualized)... 3.74% 2.81% 3.04% 2.12%
Ratio of Expenses to Average Net Assets (annualized)................ 2.86% 3.42%
<S> <C> <C>
Ratio of Net Investment Income to Average Net Assets (annualized)... 2.93% 2.12%
</TABLE>
Total return does not reflect the effect of sales charges.
* Non-Annualized
See Financial Statements and Notes Thereto
9
<PAGE> 358
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital New York Tax Free Income Fund (the "Fund") is a
non-diversified, separate series of Van Kampen American Capital Tax Free Trust
(the "Trust"), an open-end management investment company, commonly known as a
"mutual fund," organized as a Delaware business trust. Mutual funds sell their
shares to investors and invest the proceeds in a portfolio of securities. A
mutual fund allows investors to pool their money with that of other investors in
order to obtain professional investment management. Mutual funds generally make
it possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to other mutual funds distributed by
Van Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The investment objective of the Fund is to provide investors a high level of
current income exempt from federal, New York State and New York City income
taxes, consistent with preservation of capital. The Fund's investment objective
is a fundamental policy and may not be changed without shareholder approval of
the holders of a majority of the Fund's outstanding voting securities, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"). The
Fund is designed for investors who are residents of New York for tax purposes.
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.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in New York municipal securities rated investment grade at the time of
investment. Investment grade securities are securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P"), Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or have an equivalent rating by another nationally
recognized statistical rating organization ("NRSRO") in the case of long-term
obligations, and have equivalent ratings in the case of short-term obligations.
According to published guidelines, securities rated BBB by S&P are regarded by
S&P as having an adequate capacity to pay interest and repay principal. Whereas
such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead
10
<PAGE> 359
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories. According to published guidelines,
securities rated Baa by Moody's are considered by Moody's as medium grade
obligations. Such securities are, in the opinion of Moody's, neither highly
protected nor poorly secured. Interest payments and principal security appear to
Moody's to be adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
In the opinion of Moody's they lack outstanding investment characteristics and
in fact have speculative characteristics as well. The Fund's policy with respect
to ratings is not a fundamental policy, and thus may be changed by the Trustees
without shareholder approval.
Up to 20% of the Fund's total assets may be invested in New York municipal
securities rated below investment grade (but not rated lower than B- by S&P, B3
by Moody's or an equivalent rating by another NRSRO) and unrated New York
municipal securities that the Adviser considers to be of comparable quality to
such securities. According to published guidelines, securities rated below
investment grade are regarded by S&P, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While in the opinion of S&P such securities will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions. According to
published guidelines, securities rated below investment grade are regarded by
Moody's as generally lacking characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the securities' contract over any long period of time may, in the opinion of
Moody's, be small. Debt securities rated below investment grade are commonly
referred to as "junk bonds." For a description of S&P's and Moody's ratings see
the Statement of Additional Information. From time to time the Fund temporarily
may also invest up to 10% of its assets in tax exempt money market funds. Such
instruments will be treated as investments in municipal securities.
The Adviser will buy and sell securities for the Fund's portfolio with a view
to seeking a high level of current income exempt from federal, New York State
and New York City income taxes and will select securities which the Adviser
believes entail reasonable credit risk considered in relation to the investment
policies of the Fund. As a result, the Fund will not necessarily invest in the
highest yielding New York municipal securities permitted by its investment
policies if the Adviser determines that market risks or credit risks associated
with such investments would subject the Fund's portfolio to undue risk. The
potential for realization of capital gains resulting from possible changes in
interest rates will not be a major consideration. Other than for tax purposes,
frequency of portfolio turnover generally will not be a limiting factor if the
Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that its annual portfolio turnover rate normally will be less than
200%. A high rate of portfolio turnover involves correspondingly greater
brokerage commission expenses or dealer costs than a lower rate, which expenses
and costs must be borne by the Fund and its shareholders. High portfolio
turnover
11
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may also result in the realization of substantial net short-term capital gains
and any distributions resulting from such gains will be taxable. See "Tax
Status" in this Prospectus and "Investment Policies and Restrictions" in the
Statement of Additional Information.
At times, conditions in the markets for New York municipal securities may, in
the Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may use alternative strategies primarily designed to reduce fluctuations
in the value of the Fund's assets. In implementing these "defensive" strategies,
the Fund may invest to a substantial degree in high-quality, short-term New York
municipal obligations. If these high-quality, short-term New York municipal
obligations are not available or, in the Adviser's judgment, do not afford
sufficient protection against adverse market conditions, the Fund may invest in
high quality municipal securities of issuers other than issuers of New York
municipal securities. Furthermore, if such high-quality municipal securities are
not available or, in the Adviser's judgment, do not afford sufficient protection
against adverse market conditions, the Fund may invest in taxable obligations.
Such taxable obligations may include: obligations of the U.S. Government, its
agencies or instrumentalities; other debt securities rated within the four
highest categories by either S&P or Moody's (or comparably rated by another
NRSRO); commercial paper rated in the highest grade by either rating service (or
comparably rated by another NRSRO); certificates of deposit and bankers'
acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Adviser considers
consistent with such strategy. To the extent that the Fund invests a substantial
portion of its assets in municipal securities other than New York municipal
securities or in taxable securities for temporary defensive purposes, the Fund
will not be invested in a manner primarily designed to achieve a high level of
current income exempt from federal, New York State and New York City income
taxes.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
GENERAL. Municipal securities are obligations issued by or on behalf of
states, territories or possessions of the United States, the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest on which, in the opinion of bond counsel or other counsel to the issuer
of such securities is, at the time of issuance, exempt from federal income tax.
New York municipal securities are municipal securities the interest on which, in
the opinion of bond counsel or other counsel to the issuers of such securities,
is at the time of issuance exempt from New York State and New York City
individual income tax. Under normal market conditions, at least 80% of the
Fund's assets will be invested in New York municipal securities. The policy
stated in the foregoing sentence is a fundamental policy of the Fund and cannot
be changed without approval of the shareholders of
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<PAGE> 361
the Fund. Up to 20% of the Fund's assets may be invested in municipal securities
that are subject to the federal alternative minimum tax.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities, there are a
variety of types of municipal securities, including fixed and variable rate
securities, municipal notes, municipal leases, custodial receipts, participation
certificates and derivative municipal securities the terms of which include
elements of, or are similar in effect to, certain Strategic Transactions (as
defined below) in which the Fund may engage. Variable rate securities bear rates
of interest that are adjusted periodically according to formulae intended to
reflect market rates of interest. The Fund may also invest in derivative
variable rate securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. When market rates of interest
decrease, the change in value of such securities will have a positive effect on
the net asset value of the Fund and when market rates of interest increase, the
change in value of such securities will have a negative effect on the net asset
value of the Fund. The extent of increases and decreases in the value of inverse
floaters and the corresponding change to the net asset value of the Fund
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. The Fund will not invest more than
20% of its total assets in securities whose rates vary inversely with changes in
market rates of interest.
Municipal notes include tax, revenue and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain temporary
funds for various public purposes. Municipal leases are obligations issued by
state and local governments or authorities to finance the acquisition of
equipment and facilities. Certain municipal lease obligations may include
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. Custodial receipts are
underwritten by securities dealers or banks and evidence ownership of future
interest payments, principal payments or both on certain municipal securities.
Participation certificates are obligations issued by state or local governments
or authorities to finance the acquisition of equipment and facilities. They may
represent participations in a lease, an installment purchase contract, or a
conditional sales contract. Municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Other than as set forth above, there is
no limitation with respect to the amount of the
13
<PAGE> 362
Fund's assets that may be invested in the foregoing types of municipal
securities. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets and
the markets for such securities may be less developed than the market for
conventional fixed rate municipal securities. A more detailed description of
the types of municipal securities in which the Fund may invest is included in
the Statement of Additional Information.
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 invest primarily in longer term municipal securities.
The Fund will, however, invest in shorter term municipal securities when it
believes market conditions warrant such investments. The net asset value of the
Fund will change with changes in the value of its portfolio securities. Because
the Fund will invest primarily in fixed income municipal securities, the net
asset value of the Fund can be expected to change as general levels of interest
rates fluctuate. When interest rates decline, the value of a portfolio invested
in fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. The prices of longer term
municipal securities generally are more volatile with respect to changes in
interest rates than the prices of shorter term municipal securities. Volatility
may be greater during periods of general economic uncertainty.
Although at least 80% of the municipal securities in which the Fund may invest
will be 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 securities experiencing non-payment and a potential decrease in the
net asset value of the Fund.
Up to 20% of the Fund's assets may be invested in municipal securities that
are subject to the federal alternative minimum tax. The Fund may not be a
suitable investment for investors who are already subject to the federal
alternative minimum tax or who would become subject to the federal alternative
minimum tax as a result of an investment in the Fund. In addition, income earned
or deemed to be earned with respect to the Fund's Strategic Transactions, if
any, will be taxable. See "Tax Status."
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
14
<PAGE> 363
LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in New York municipal securities rated below investment grade (but not
rated lower than B- by S&P or B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated New York municipal securities considered by the Adviser to
be of comparable quality to such securities. Higher yields are generally
available from municipal securities of such grade. With respect to such 20% of
the Fund's total assets, the Fund has not established any limit on the
percentage of its portfolio which may be invested in securities in any one
rating category or comparable unrated securities.
Investors should carefully consider the risks of owning shares of an
investment company which invests in lower grade municipal securities before
making an investment in the Fund. The higher yield on certain securities held by
the Fund reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. See "Special
Considerations Regarding the Fund."
The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
See "Special Considerations Regarding the Fund."
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in New York municipal
securities for purposes of the Fund's 80% investment policy with respect
thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
15
<PAGE> 364
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. The Strategic Transactions that the Fund may
use and some of their risks are described more fully in the Fund's Statement of
Additional Information.
16
<PAGE> 365
Income earned or deemed to be earned, by the Fund from, among other things,
its Strategic Transactions and temporary defensive strategies, if any, generally
will be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Fund relies on the buyer or seller, as the
case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including 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.
OTHER PRACTICES. The Fund may borrow amounts up to 5% of its net assets in
order to pay for redemptions when liquidation of portfolio securities is
considered disadvantageous or inconvenient and may pledge up to 10% of its net
assets to secure such borrowings.
Under normal market conditions, the Fund will invest substantially all of its
assets in New York municipal securities. The Fund generally will not invest more
than 25% of its total assets in any industry. Governmental issuers of municipal
securities are not considered part of any "industry." However, municipal
securities
17
<PAGE> 366
backed only by the assets and revenues of nongovernmental users may for this
purpose be deemed to be issued by such nongovernmental users, and the 25%
limitation would apply to such obligations. It is therefore possible that the
Fund may invest more than 25% of its assets in a broader segment of the
municipal securities market, such as revenue obligations of hospitals and other
health care facilities, housing agency revenue obligations, or airport revenue
obligations if the Adviser determines that the yields available from obligations
in a particular segment of the market justifies the additional risks associated
with a large investment in such segment. Although such obligations could be
supported by the credit of governmental users, or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example, proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products) may have a general adverse effect on all municipal
securities in such a market segment.
From time to time, the Fund's investments may include securities as to which
the Fund, by itself or together with other funds or accounts managed by the
Adviser, holds a major portion or all of an issue of New York municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Adviser believes it is advisable to do so.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See "Investment
Policies and Restrictions" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The income securities in which the Fund invests are
traded principally in the over-the-counter market. In the over-the-counter
market, securities are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the
18
<PAGE> 367
manner of executing securities transactions for the Fund will be prompt
execution of orders, the size and breadth of the market for the security, the
reliability, integrity and financial condition and execution capability of the
firm, the size of and difficulty in executing the order, and the best net price.
There are many instances when, in the judgment of the Adviser, more than one
firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
- ------------------------------------------------------------------------------
GENERAL. In normal circumstances, the Fund may invest up to 20% of its total
assets in New York municipal securities rated below investment grade (but not
rated lower than B- by S&P, B3 by Moody's or an equivalent rating by another
NRSRO) or in unrated New York municipal securities considered by the Adviser to
be of comparable quality to such securities. Investment in such lower grade
municipal securities involves special risks as compared with investment in
higher grade municipal securities. The market for lower grade municipal
securities is considered to be less liquid than the market for investment grade
municipal securities which may adversely affect the ability of the Fund to
dispose of such securities in a timely manner at a price which reflects the
value of such security in the Adviser's judgement. The market price for less
liquid securities tends to be more volatile than the market price for more
liquid securities. Illiquid securities and the absence of readily available
market quotations with respect thereto may make the Adviser's valuation of such
securities more difficult, and the Adviser's judgement may play a greater role
in the valuation of the Fund's securities. Lower grade municipal securities
generally involve greater credit risk than higher grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates and individual issuer developments. Because issuers of lower
grade municipal securities frequently choose not to seek a rating of their
municipal securities, the Fund will rely more heavily on the Adviser's ability
to determine the relative investment quality of such securities than if the Fund
invested exclusively in higher grade municipal securities. The Fund may, if
deemed appropriate by the Adviser, retain a security whose rating has been
downgraded below B- by S&P, below B3 by Moody's or an equivalent rating by
another
19
<PAGE> 368
NRSRO, or whose rating has been withdrawn. More detailed information concerning
the risks associated with instruments in lower grade municipal securities is
included in the Fund's Statement of Additional Information.
The Fund may invest up to 20% of its total assets in derivative variable rate
securities such as inverse floaters whose rates of interest vary inversely with
changes in market rates of interest. When market rates of interest decrease, the
change in value of such securities will have a positive effect on the net asset
value of the Fund and when market rates of interest increase, the change in
value of such securities will have a negative effect on the net asset value of
the Fund. Investment in such securities involve special risks as compared to a
fixed rate municipal security. The extent of increases and decreases in the
value of inverse floaters and the corresponding change to per share net asset
value of the Fund 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. The markets for inverse
variable rate securities may be less developed than the market for conventional
fixed rate municipal securities.
SPECIAL CONSIDERATIONS REGARDING NEW YORK MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of New York municipal securities. The State of New York has
historically been one of the wealthiest states in the nation. For decades,
however, the economy of the State of New York has grown more slowly than that of
the nation as a whole, and the result has been a gradual erosion of the State's
relative economic affluence. New York City, for example, has faced greater
competition as other major cities have developed financial and business
capabilities which make them less dependent on the specialized services
traditionally available almost exclusively in New York City.
The State of New York has for many years had a very high state and local tax
burden. The burden of state and local taxation, in combination with the many
other causes of regional economic dislocations, has contributed to the decisions
of some businesses and individuals to relocate outside, or not locate within,
the State of New York.
There can be no assurance that the State of New York and its political
subdivisions will not face substantial potential budget gaps in future years
resulting from a significant disparity between tax revenues projected from a
lower recurring receipts base and the spending required to maintain programs at
current levels. To address any potential budgetary imbalance, the State of New
York and such subdivisions may need to take significant actions to align
recurring receipts and disbursements in future fiscal years.
Although revenue obligations of the State of New York or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of
20
<PAGE> 369
the portfolio of the Fund or the ability of the respective obligors to make
timely payments of principal and interest on such obligations.
More detailed information concerning New York municipal securities and the
State of New York is included in the Statement at Additional Information.
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,800 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen American
Capital Distributors, Inc., the distributor of the Fund and sponsor of the funds
mentioned above, is 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 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.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for the overall management of the Fund's
business affairs. The Fund
21
<PAGE> 370
will pay the Adviser a fee equal to a percentage of the average daily net assets
of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------------------------------------- --------------
<S> <C>
First $500 million..................................... 0.600 of 1.00%
Over $500 million...................................... 0.500 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the 1940 Act, of the Adviser, the Distributor
or Van Kampen American Capital), the charges and expenses of independent
accountants, legal counsel, any transfer or dividend disbursing agent and the
custodian (including fees for safekeeping of securities), costs of calculating
net asset value, costs of acquiring and disposing of portfolio securities,
interest (if any) on obligations incurred by the Fund, costs of share
certificates, membership dues in the Investment Company Institute or any similar
organization, reports and notices to shareholders, costs of registering shares
of the Fund under the federal securities laws, miscellaneous expenses and all
taxes and fees to federal, state or other governmental agencies. The Adviser
reserves the right in its sole discretion from time-to-time to waive all or a
portion of its management fee or to reimburse the Fund for all or a portion of
its other expenses.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
preclearance and other procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, supervises the Adviser's municipal securities practice area and
coordinates the Adviser's investment policy regarding such securities. Mr.
Johnson has been employed by the Adviser since April 1989. Dennis S. Pietrzak, a
Vice President of the Adviser, has been primarily responsible for the day-to-day
management of the Fund's portfolio since August 1995. Mr. Pietrzak has been
employed by the Adviser since August, 1995. Prior to joining the Adviser, Mr.
Pietrzak was employed by Merrill Lynch where he was in charge of municipal
underwriting and trading in Merrill Lynch's midwest region.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider
22
<PAGE> 371
such factors together with the amount of sales charges and accumulated
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares or Class C Shares. If
such an investor anticipates that he or she will redeem such shares prior to the
expiration of the CDSC period applicable to Class B Shares, the investor may
wish to acquire Class C Shares. Investors must weigh the benefits of deferring
the sales charge and having all of their funds invested against the higher
aggregate distribution and service fee applicable to Class B Shares and Class C
Shares (discussed below).
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those
23
<PAGE> 372
distribution fees, service fees and administrative expenses applicable to the
respective class of shares as a result of its sales arrangements, (ii) has
exclusive voting rights with respect to those provisions of the Fund's Rule
12b-1 distribution plan which relate only to such class and (iii) has a
different exchange privilege. Generally, a class of shares subject to a higher
ongoing distribution and service fee or subject to the conversion feature will
have a higher expense ratio and pay lower dividends than a class of shares
subject to a lower ongoing distribution and service fee or not subject to the
conversion feature. The per share net asset values of the different classes of
shares are expected to be substantially the same; from time to time, however,
the per share net asset values of the classes may differ. The net asset value
per share of each class of shares of the Fund will be determined as described in
this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares. All such expenses incurred by a class will be
borne on a pro rata basis by the outstanding shares of such class. All
allocations of administrative expenses to a particular class of shares will be
limited to the extent necessary to preserve the Fund's qualification as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the public on a continuous basis
through Van Kampen American Capital Distributors, Inc. (the "Distributor"), as
principal underwriter, which is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181. Shares also are offered through members of the National
Association of Securities Dealers, Inc. ("NASD") acting as securities dealers
("dealers") and through NASD members acting as brokers for investors ("brokers")
or eligible non-NASD members acting as agents for investors ("financial
intermediaries"). The Fund reserves the right to suspend or terminate the
continuous public offering of its shares at any time and without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or
24
<PAGE> 373
financial intermediary or directly with the Distributor plus any applicable
sales charge. Sales personnel or brokers, dealers and financial intermediaries
distributing the Fund's shares may receive different compensation for selling
different classes of shares. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the order to the Distributor.
Because the Fund generally will determine net asset value once each business day
as of the close of business, purchase orders placed through an investor's
broker, dealer or financial intermediary must be transmitted to the Distributor
by such broker, dealer or financial intermediary prior to such time in order for
the investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the purchase price due to the failure of the
Distributor to receive a purchase order prior to such time must be settled
between the investor and the broker, dealer or financial intermediary submitting
the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. Such payments to
brokers, dealers and financial intermediaries for sales contests, other sales
programs and seminars are made by the Distributor out of its own assets and not
out of the assets of the Fund. These programs will not change the price an
investor pays for shares or the amount that the Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges
25
<PAGE> 374
and dealer concessions reallowed to dealers and agency commissions paid to
brokers with respect to sales of Class A Shares. The sales charge is allocated
between the investor's broker, dealer or financial intermediary and the
Distributor. As indicated previously, at the discretion of the Distributor, the
entire sales charge may be reallowed to such broker, dealer or financial
intermediary. The staff of the SEC has taken the position that dealers who
receive 90% or more of the sales charge may be deemed to be "underwriters" as
that term is defined in the Securities Act of 1933, as amended.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
----------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.............. 4.75% 4.99% 4.25%
$100,000 but less than
$250,000...................... 3.75 3.90 3.25
$250,000 but less than
$500,000...................... 2.75 2.83 2.25
$500,000 but less than
$1,000,000.................... 2.00 2.04 1.75
$1,000,000 or more*............. * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to brokers, dealers or
financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million. See "Purchase of Shares--Deferred Sales Charge
Alternatives" for additional information with respect to contingent
deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the 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.
26
<PAGE> 375
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of other Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
27
<PAGE> 376
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement 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 other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an
28
<PAGE> 377
investment subadviser to any fund described in (1) above or an affiliate
of such subadviser; and such persons' families and their beneficial
accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
(9) Participants in any 403(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
29
<PAGE> 378
connection with such purchases, the Distributor may pay, out of its own
assets, a commission to brokers, dealers, or financial intermediaries as
follows: 1.00% on sales up to $5 million, plus 0.50% of the next $5
million, plus 0.25% on the excess over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and other financial
intermediaries which percentage rate will be equal to (i) with respect to Class
A Shares, 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million; (ii) 4.00%
with respect to Class B Shares; and (iii) 1.00% with respect to Class C Shares.
Such compensation will not change the price an investor will pay for CDSC Shares
or the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below
charged as a percentage of the dollar amount subject thereto. The amount of the
contingent deferred sales charge will vary depending on (i) the class of CDSC
Shares to which such shares belong and (ii) the number of years from the time of
payment for the purchase of the CDSC Shares until the time of their redemption.
The charge will be assessed on an amount equal to the lesser of the then current
market value or the original purchase price of the CDSC Shares being redeemed.
Accordingly, no sales charge will be imposed on increases in net asset value
above the initial purchase
30
<PAGE> 379
price. In addition, no contingent deferred sales charge will be assessed on CDSC
Shares derived from reinvestment of dividends or capital gains distributions.
Solely for purposes of determining the number of years from the time of any
payment for the purchases of CDSC Shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents and
for selling such shares. The combination of the contingent deferred sales charge
and the distribution fee facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares or Class C Shares, if any, and fourth of CDSC
Shares held longest during the period of time that a contingent deferred sales
charge is applicable to such CDSC Shares. The charge will not be applied to
dollar amounts representing an increase in the net asset value since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00% on redemptions made within one year of the purchase. A
commission will be paid to dealers who initiate and are responsible for
purchases of $1 million or more as follows: 1.00% on sales to $2 million, plus
0.80% on the next million, plus 0.20% on the next $2 million and 0.08% on the
excess over $5 million.
31
<PAGE> 380
CLASS B SHARES. Class B Shares redeemed within seven years of purchase
generally will be subject to a contingent deferred sales charge at the rates set
forth below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- -------------------- -------------------
<S> <C> <C>
First.................................................. 4.00%
Second................................................. 3.75%
Third.................................................. 3.50%
Fourth................................................. 2.50%
Fifth.................................................. 1.50%
Sixth.................................................. 1.00%
Seventh and after...................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services--Systematic Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first 12 months of purchase
generally will be subject to a contingent deferred sales charge of 1.00% of the
dollar amount subject thereto. Class C Shares redeemed thereafter will not be
subject to a contingent deferred sales charge.
Conversion Feature. Seven years or ten years after the end of the month in
which a shareholder's order to purchase a Class B Share or Class C Share,
respectively, of the Fund was accepted, such share automatically will convert to
a Class A Share and no longer will be subject to the higher aggregate
distribution and service fees applicable to Class B Shares or Class C Shares.
The purpose of the conversion feature is to relieve the holders of Class B
Shares and Class C Shares that have been outstanding for a period of time
sufficient for the Distributor to have been compensated for distribution
expenses related to such shares from most of the burden of such
distribution-related expenses. The Fund does not expect to issue any share
certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
Shares purchased through the reinvestment of dividends and distributions paid in
respect of such shares in a shareholder's 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 account (other than those in the sub-account) convert to Class A
Shares, an equal pro rata portion of the shares in the respective sub-account
also will convert to Class A Shares.
The contingent deferred sales charge schedule and conversion schedule
applicable to a CDSC Share acquired through the exchange privilege is determined
by reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a CDSC Share acquired through
32
<PAGE> 381
the exchange privilege is determined by reference to the date such share
originally was purchased from a Van Kampen American Capital fund.
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 higher distribution and service fee and transfer
agency costs with respect to such shares does not result in the Fund's dividends
or distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of such shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares or Class C Shares to
Class A Shares may be suspended if such an opinion is no longer available. In
that event, no further conversions of such shares would occur and such shares
might continue to be subject to the higher aggregate distribution and service
fees for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different class of shares are expected to be substantially the same; from
time to time, however, the per share net asset value of the different class of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
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instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
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SHAREHOLDER SERVICES
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The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the
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<PAGE> 383
Fund. Such shares are acquired at net asset value (without sales charge) on the
record date of such dividend or distribution. Unless the shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS. The investor may, on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations. Before effecting an exchange, shareholders in the Fund
should obtain and read a current prospectus of the fund into which the exchange
is to be made. SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
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<PAGE> 384
No sales charge is imposed upon the exchange of Class B Shares or Class C
Shares. The contingent deferred sales charge schedule and conversion schedule
applicable to a Class B Share or Class C Share acquired through the exchange
privilege is determined by reference to the Van Kampen American Capital fund
from which such share originally was purchased. The holding period of a Class B
Share or Class C Share acquired through the exchange privilege is determined by
reference to the date such share originally was purchased from a Van Kampen
American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a systematic
withdrawal plan for the new account or dividend diversification options for the
new account, an exchanging shareholder must file a specific written request. The
Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal
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<PAGE> 385
plan. This plan provides for the orderly use of the entire account, not only the
income but also the capital, if necessary. Each withdrawal constitutes a
redemption of shares on which taxable gain or loss will be recognized. The plan
holder may arrange for monthly, quarterly, semi-annual, or annual checks in any
amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Fund for which
certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization for Redemption by Check
Form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares to the order of any person in
any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A Shares required to cover the amount of the check are redeemed
from the shareholder's account by ACCESS at the next determined net asset value.
Check writing redemptions represent the sale of Class A Shares. Any gain or loss
realized on the sale of Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing
37
<PAGE> 386
privilege may be terminated or suspended at any time by the Fund or State Street
Bank. Retirement plans and accounts that are subject to backup withholding are
not eligible for the privilege. A "stop payment" system is not available on
these checks.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for
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<PAGE> 387
shares redeemed (less any sales charge, if applicable) will ordinarily be made
by check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are
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<PAGE> 388
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
the shares to be redeemed have been recently purchased by check, ACCESS may
delay mailing a redemption check or wiring redemption proceeds until it confirms
that the purchase check has cleared, usually a period of up to 15 days. If an
account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next
40
<PAGE> 389
determined net asset value without sales charge. Any applicable contingent
deferred sales charge will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
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THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
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<PAGE> 390
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of December 31, 1995, there were $381,591
and $3,860 of unreimbursed distribution related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 3.91% and 0.94% of the
Fund's net assets attributable to
42
<PAGE> 391
Class B Shares and Class C Shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution related expenses
attributable to any other class of shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required to register as dealers pursuant to state
law. In the unlikely event that a court were to find that these laws prevent
such banks from providing such services described above, the Fund would seek
alternate providers and expects that shareholders would not experience any
disadvantage.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income, dividends, and other ordinary income earned by
the Fund, less all expenses of the Fund attributable to the class of shares in
question. Net short-term capital gains, if any, may be distributed throughout
the year. Expenses of the Fund are accrued each day. Net realized long-term
capital gains, if any, are expected to be distributed, to the extent permitted
by applicable law, to shareholders at least annually. Distributions cannot be
assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee will be lower than distributions
with respect to a class of shares subject to a lower distribution fee.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement.
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<PAGE> 392
Shares remain entitled to dividends through the day such shares are processed
for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the Reinvestment Plan is automatic. Instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following New York State, New York City and federal income tax discussion
is based on the advice of Skadden, Arps, Slate, Meagher & Flom, and reflects
applicable income tax laws, as of the date of this Prospectus.
NEW YORK TAXATION. Individual shareholders will not be subject to New York
State or New York City income tax on distributions attributable to interest on
New York municipal securities. Individual shareholders will be subject to New
York State or New York City income tax on distributions attributable to other
income of the Fund (including net capital gain), and on gain on the sale of
shares of the Fund. Corporations should note that all or a part of any
distribution from the Fund, and gain on the sale of shares of the Fund, may be
subject to the New York State corporate franchise tax and the New York City
general corporation tax.
Under currently applicable New York State law, the highest marginal New York
State income tax rate imposed on individuals for taxable years beginning in 1994
is 7.875%, which is currently scheduled to decline to approximately 7.59% for
taxable years beginning in 1995 and to 7.125% for taxable years beginning
thereafter. The highest marginal New York City income tax rate currently imposed
on individuals is 4.57%. In addition, individual taxpayers with New York
adjusted gross income in excess of $100,000 must pay a supplemental tax to
recognize the benefit of graduated tax rates. Due to the ongoing budgetary
problems of both New York State and New York City, these income tax rates are
subject to change at any time. Shareholders subject to taxation in a state other
than New York will realize a lower after-tax rate of return if distributions
from the Fund are not exempt from taxation in such other state.
44
<PAGE> 393
FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gains, but not net capital gain, which is the
excess of net long-term capital gains over net short-term capital losses), in
each year, it will not be required to pay federal income taxes on any net
investment income distributed to shareholders. The Fund intends to distribute at
least the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. Similarly, the Fund will not be subject to federal
income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (which does not
include tax-exempt income) for such year and at least 98% of its net capital
gains (the latter of which is generally computed on the basis of the one-year
period ending on October 31 of such year), plus any required distribution
amounts that were not distributed in previous taxable years. For purposes of the
excise tax, any ordinary income or capital gain net income retained by, and
subject to federal income tax in the hands of, the Fund will be treated as
having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income was
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were
45
<PAGE> 394
closed out), which may cause the Fund to recognize income without receiving cash
with which to make distributions in amounts necessary to satisfy the 90%
distribution requirement and the distribution requirements for avoiding income
and excise taxes. The Fund will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid income and excise taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
DISTRIBUTIONS. If the Fund qualifies as a regulated investment company and
satisfies the 90% distribution requirement, and if, at the close of each quarter
of the Fund's taxable year, at least 50% of the total value of the Fund's assets
consists of obligations the interest on which is exempt from federal income tax
("tax-exempt obligations"), the Fund will be qualified to pay exempt-interest
dividends to its shareholders to the extent of its tax-exempt interest income
(less expenses applicable thereto). Exempt-interest dividends are excludable
from a shareholder's gross income for federal income tax purposes, but may be
taxable distributions for state, local and other tax purposes. Exempt-interest
dividends are included, however, in determining what portion, if any, of a
person's social security and railroad retirement benefits will be includable in
gross income subject to federal income tax. Interest expense with respect to
indebtedness incurred or continued by a shareholder to purchase or carry shares
of the Fund is not deductible to the extent that such interest relates to
exempt-interest dividends received from the Fund.
Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gain
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. All or a portion of the Fund's gain from the
sale or redemption of tax-exempt obligations purchased at a
46
<PAGE> 395
market discount will be treated as ordinary income rather than capital gain.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such shareholders (assuming
such shares are held as a capital asset). It is not expected that any portion of
the distributions from the Fund will be eligible for the dividends received
deduction for corporations. The Fund will inform shareholders of the source and
tax status of distributions promptly after the close of each calendar year.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a measure of income that
includes interest on tax-exempt obligations exceeds the amount otherwise
determined to be the alternative minimum taxable income. Accordingly, investment
in the Fund may cause such shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 prior to the date of payment. In addition,
certain other distributions made after the close of a taxable year of the Fund
may be "spilled back" and treated as paid by the Fund (except for purposes of
the 4% excise tax) during such taxable year. In such case, shareholders will be
treated as having received such dividends in the taxable year in which the
distribution is actually made.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES. Redemption or sale of shares of the Fund will be a taxable
transaction for federal income tax purposes. Redeeming shareholders will
generally recognize gain or loss in an amount equal to the difference between
their basis in such redeemed shares of the Fund and the amount received. If such
shares are held as a capital asset, the gain or loss will be a capital gain or
loss and will generally be long-term if such shares have been held for more than
one year. Any loss realized on a taxable disposition of shares held for six
months or less will be disallowed to
47
<PAGE> 396
the extent of any exempt-interest dividends received with respect to such
shares. If such loss is not entirely disallowed, it will be treated as a
long-term capital loss to the extent of any capital gain dividends received with
respect to such shares. For purposes of determining whether shares have been
held for six months or less, the holding period is suspended for any periods
during which the shareholder's risk of loss is diminished as a result of holding
one or more other positions in substantially similar or related property or
through certain options or short sales.
GENERAL. The federal and New York income tax discussion set forth above is
for general information only. Prospective investors should consult their tax
advisers regarding the specific federal and New York tax consequences of holding
and disposing of shares, as well as the effects of other state, local and
foreign tax laws and any proposed tax law changes. Also, see "Tax Status of the
Fund" in the Statement of Additional Information for further information.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
48
<PAGE> 397
From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1994 under the name Van Kampen Merritt New York Tax Free
Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust. The Fund was reorganized as a series of the Trust 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.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and are identical
in all respects except that each class bears certain distribution expenses and
has exclusive voting rights with respect to its distribution fee. See "The
Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares 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
holders of Class B Shares and Class C Shares are likely to be lower than to
other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed
49
<PAGE> 398
information concerning the Trust is set forth in the Statement of Additional
Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent auditors, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital New
York Tax Free Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
50
<PAGE> 399
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN AMERICAN CAPITAL
NEW YORK TAX FREE
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
New York Tax Free Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
New York Tax Free Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 400
------------------------------------------------------------------------------
NEW YORK TAX FREE INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 401
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
Van Kampen American Capital Tax Free High Income Fund, formerly known as Van
Kampen Merritt Tax Free High Income Fund (the "Fund") is a separate diversified
series of Van Kampen American Capital Tax Free Trust, a Delaware business trust
(the "Trust"), an open-end management investment company commonly known as a
mutual fund. The Fund's investment objective is to attempt to provide investors
with a high level of current income exempt from federal income taxes primarily
through investment in a diversified portfolio of medium and lower grade
municipal securities. The Fund's portfolio is managed by Van Kampen American
Capital Investment Advisory Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated 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.
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. (the "SEC"). This omitted information
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>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Trustees and Officers................................................................ B-11
Investment Advisory and Other Services............................................... B-18
Custodian and Independent Auditors................................................... B-20
Portfolio Transactions and Brokerage Allocation...................................... B-20
Tax Status of the Fund............................................................... B-21
The Distributor...................................................................... B-21
Legal Counsel........................................................................ B-22
Performance Information.............................................................. B-22
Independent Auditors' Report......................................................... B-24
Financial Statements................................................................. B-25
Notes to Financial Statements........................................................ B-39
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 402
THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust. 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
("Declaration of Trust"). At present, the Fund, Van Kampen American Capital
Insured Tax Free Income Fund, Van Kampen American Capital California Insured Tax
Free Fund, Van Kampen American Capital Municipal Income 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 Merritt American Capital Michigan Tax Free Income Fund, Van
Kampen American Capital Missouri Tax Free Income Fund and Van Kampen American
Capital Ohio Tax Free Income Fund have been organized as series of the Trust but
have not commenced investment operations. Other series may be organized and
offered in the future. The Fund originally was organized as a Maryland
corporation under the name Van Kampen Merritt Tax Free High Income Fund Inc. and
was reorganized under the name Van Kampen Merritt Tax Free High Income Fund as a
sub-trust of the Van Kampen Merritt Tax Free Fund, a Massachusetts business
trust. The Fund was reorganized as a series of the Trust and adopted its present
name as of July 31, 1995.
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. The Trust can issue an unlimited number of shares,
$0.01 par value (prior to July 31, 1995, the shares had no par value). Each
share of the Trust represents an equal proportionate interest in the assets of
its respective series with each other share in such series and no interest in
any other series. No series is subject to the liabilities of any other series.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights other than those described in the prospectus.
The Trust does not contemplate holding regular meetings of shareholders to elect
Trustees or otherwise. However, the holders of 10% or more of the outstanding
shares may by written request require a meeting to consider the removal of
Trustees by a vote of two-thirds of the shares then outstanding cast in person
or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the 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 Objectives and Policies." There can be no assurance that the
Fund will achieve its objective.
B-2
<PAGE> 403
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer.
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." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in their respective portfolios.
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 money market funds that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax exempt money market fund or securities of any tax exempt money
market fund aggregating in value more than 5% of the total assets of the
Fund.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
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
B-3
<PAGE> 404
(ii) 67% of the Fund's shares present at a meeting at which the holders of more
than 50% of the outstanding shares are present in person or by proxy. As long as
the percentage restrictions described above are satisfied at the time of the
investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed. Certain of the medium
and lower grade municipal securities in which the Fund may invest may be,
subsequent to the Fund's investment in such securities, downgraded by Moody's or
S&P or may be deemed by the Adviser to be of a lower quality as a result of
impairment of the creditworthiness of the issuer of such securities or of the
project the revenues from which are the source of payment of interest and
repayment of principal with respect to such securities. In such instances, the
secondary market for such municipal securities may become less liquid, with the
possibility that more than 10% of the Fund's assets would be invested in
securities which are not readily marketable. In such event, the Fund will take
reasonable and appropriate steps to reduce the percentage of the Fund's
portfolio represented by securities that are not readily marketable, together
with any other securities subject to investment restriction eight above, to less
than 10% of the Fund's assets as soon as is reasonably practicable.
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%.
Interest on certain "private activity" obligations issued after August 7, 1986
is treated as a preference item for the purpose of calculating the alternative
minimum tax. The Fund may invest up to 20% of its assets in such "private
activity" obligations. To the extent that the Fund does invest, in such "private
activity" obligations, dividends paid to an investor who is subject to the
alternative minimum tax might not be completely tax exempt or might cause an
investor to be subject to such tax.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES.
Municipal securities include long-term obligations, which are often called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax-exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
bonds are "general obligation" and "revenue" or "special obligation" bonds,
which include "industrial revenue bonds." General obligation bonds are secured
by the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation bonds are payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special tax or other specific revenue
source such as from the user of the facility being financed. Municipal leases
are obligations issued by state and local governments or authorities to finance
the acquisition of equipment and facilities. They may take the form of a lease,
an installment purchase contract, a conditional sales contract, or a
participation certificate in any of the above. Some municipal leases and
participation certificates may not be considered readily marketable. Such
non-marketable municipal leases, together with other restricted or
non-marketable securities in the Fund's portfolio will not at the time of
purchase exceed 10% of the total assets of the Fund. The "issuer" of municipal
securities is generally deemed to be the governmental agency, authority,
instrumentality or other political subdivision, or the non-governmental user of
a facility, the assets and revenues of which will be used to meet the payment
obligations, or the guarantee of such payment obligations, of the municipal
securities.
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The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals. 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 derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
MEDIUM AND LOWER GRADE MUNICIPAL SECURITIES. Discussion concerning the
special risk factors relating to the Fund's investments in medium and lower
grade municipal securities appears in the "Municipal Securities" section of the
Prospectus under the subheading "Special Considerations and Risk Factors
Regarding Medium and Lower Grade Municipal Securities."
INVESTMENT PRACTICES.
If the Adviser deems it appropriate to seek to hedge any of the Fund's
portfolio against market value changes, the Fund may buy or sell derivative
instruments such as financial futures contracts and related options, such as
municipal bond index futures contracts and the related put or call options
contracts on such index futures. A tax exempt bond index fluctuates with changes
in the market values of the tax exempt bonds included in the index. An index
future is an agreement pursuant to which two parties agree to receive or deliver
at settlement an amount of cash equal to a specified dollar amount multiplied by
the difference between the value of the index at the close of the last trading
day of the contract and the price at which the future was originally written. A
financial future is an agreement between two parties to buy and sell a security
for a set price on a future date. An index future has similar characteristics to
a financial future except that settlement is made through delivery of cash
rather than the underlying securities. An example is the Long-Term Municipal
Bond futures contract traded on the Chicago Board of Trade. It is based on the
Bond Buyer's Municipal Bond Index, which represents an adjusted average price of
the forty most recent long-term municipal issues of $50 million or more ($75
million in the instance of housing issues) rated A or better by either Moody's
Investors Service, Inc. ("Moody's")or Standard & Poor's Ratings Group ("S&P"),
maturing in no less than nineteen years, having a first call in no less than
seven nor more than sixteen years, and callable at par.
The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.
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When the Fund engages in the purchase or sale of futures contracts or the sale
of options thereon it will deposit the initial margin required for such
contracts in a segregated account maintained with the Fund's custodian, in the
name of the futures commission merchant with whom the Fund maintains the related
account. Thereafter, if the Fund is required to make maintenance margin payments
with respect to the futures contracts, or mark-to-market payments with respect
to such option sale positions, the Fund will make such payments directly to such
futures commission merchant. The SEC currently requires mutual funds to demand
promptly the return of any excess maintenance margin or mark-to- market credits
in its account with futures commission merchants. Each Fund will comply with SEC
requirements concerning such excess margin.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, 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.
STRATEGIC TRANSACTIONS.
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the
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risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. Use of put and call options may result in losses
to the Fund, force the sale or purchase of portfolio securities at inopportune
times or for prices other than current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such 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
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imposed with respect to particular classes or series of options or underlying
securities including reaching daily price limits; (iv) interruption of the
normal operations of the OCC or an exchange; (v) inadequacy of the facilities of
an exchange or OCC to handle current trading volume; or (vi) a decision by one
or more exchanges to discontinue the trading of options (or a particular class
or series of options), in which event the relevant market for that option on
that exchange would cease to exist, although outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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
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those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or 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
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Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or 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.
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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.
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
</TABLE>
B-11
<PAGE> 412
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
B-12
<PAGE> 413
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
B-13
<PAGE> 414
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
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.
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.
</TABLE>
B-14
<PAGE> 415
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
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.
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-15
<PAGE> 416
<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-16
<PAGE> 417
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, it 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-17
<PAGE> 418
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.
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.). The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is controlled, through the ownership of a substantial majority of its common
stock by The Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D
L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc. a New York based private investment firm. The General
Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership
("C&D Associates L.P."). The general partners of C&D Associates L.P. are Joseph
L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J.
Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of Van Kampen American Capital 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
B-18
<PAGE> 419
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 any of the Fund.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid advisory
expenses of $3,705,007, $3,519,429, and $2,939,428, respectively.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares with the other Van Kampen American Capital mutual funds
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $33,600, $18,300, and $13,900, respectively, representing the
VK Adviser's cost of providing accounting services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent 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, share 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 $150,400, $111,300, and $246,800, respectively, representing
the Distributor's cost of providing certain support services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the fund's minute books and records, preparation and oversight of
the fund's regulatory
B-19
<PAGE> 420
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 $40,000, $40,000, and $20,300, 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 firms' professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the investment
adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser and still must be analyzed and reviewed
by its staff, the receipt of research information is not expected to materially
reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information to the Fund
and the Adviser, (ii) have sold or are selling shares of the Fund and (iii) may
select firms that are affiliated with the Fund, its investment adviser or its
distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
B-20
<PAGE> 421
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 commission
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the Trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the Trustees will consider from
time to time whether the advisory fee will be reduced by all or a portion of the
brokerage commission given to brokers that are affiliated with the Fund.
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, 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 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 obligated to
purchase only those shares for which it has received purchase orders. A
discussion of how to purchase and redeem the Fund's shares and how the Fund's
shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein 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 Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption
B-21
<PAGE> 422
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 Distribution Plan 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 $1,464,858, $1,236,172 and $80,827 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $1,417,770, $305,260 and
$47,183 represent payments to financial intermediaries under the Selling
Agreements for Class A Shares, Class B Shares and Class C Shares, respectively.
For the year ended December 31, 1995, the Fund has reimbursed the Distributor
$71,618 and $15,411 for advertising expenses, and $21,770 and $1,756 for
compensation of the Distributor's sales personnel for the Class A Shares and
Class B Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
CLASS A SHARES
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
B-22
<PAGE> 423
representative have tended over time to earn higher returns than those who
invested directly. The Fund will also be marketed on the Internet.
The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1995 was 10.03%; (ii) the 5 year period ended December 31, 1995 was 5.64%; and
(iii) the approximately 10 year, 6 month period from June 28, 1985 (the
commencement of investment operations of the Fund) through December 31, 1995 was
7.96%.
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 4.85%. The tax-equivalent yield 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 7.58%. 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 6.10%.
The Class A Share'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 123.47%.
The Class A Share'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 134.57%.
CLASS B SHARES
The average annual 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
10.62% and (ii) the approximately 2 year, 8 month period from May 1, 1993
(commencement of distribution) through December 31, 1995 was 5.94%.
The Class B Share's yield for the 30 day period ending December 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.30%. The tax-equivalent yield 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 6.72%. The Class
B Share's current distribution rate for the month ending December 31, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.65%.
The Class B Share's cumulative non-standardized total return including payment
of the CDSC from its inception to the end of the current period was 16.62%.
The Class B Share's cumulative non-standardized total return excluding payment
of the CDSC from its inception to the end of the current period was 20.12%.
CLASS C SHARES
The average total annual return, including payment of the CDSC, with respect
to the Class C Shares for (i) the one year period ended December 31, 1995 was
13.70% and (ii) the approximately 2 year, 5 month period from August 13, 1993
(commencement of distribution) through December 31, 1995 was 6.01%.
The Class C Share's yield for the 30 day period ending December 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 4.30%. The tax-equivalent yield 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 6.72%. The Class
C Share's current distribution rate for the month ending December 31, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.64%.
The Class C Share's cumulative non-standardized total return, including
payment of the CDSC from its inception to the end of the current period was
15.14%.
The Class C Share's cumulative non-standardized total return, excluding
payment of the CDSC from its inception to the end of the current period was
15.14%.
B-23
<PAGE> 424
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen American Capital Tax Free High Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Tax Free High 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 Tax Free High 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-24
<PAGE> 425
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
Alabama 0.5%
$ 2,840 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee Insd) ...... 5.875% 08/15/25 $ 2,929,148
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
------------
3,988,328
------------
Alaska 0.4%
3,000 Alaska St Hsg Fin Corp Ser A (MBIA Insd) ................................ 5.875 12/01/24 3,024,150
------------
Arizona 2.1%
6,325 Chandler, AZ Indl Dev Auth Indl Dev Rev Chandler Fin Cent Proj <F4> ..... 9.875 12/01/16 5,376,250
7,775 Chandler, AZ Indl Dev Auth Indl Dev Rev SMP II Ltd Partnership Proj ..... 7.500 12/01/15 7,782,231
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj (Var Rate
Cpn)..................................................................... 5.040 10/01/12 1,008,070
2,700 Maricopa Cnty, AZ Unified Sch Dist No 41 Gilbert Rfdg (FGIC Insd) ....... * 01/01/08 1,485,378
1,245 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A .............................. 11.000 07/01/00 1,445,021
------------
17,096,950
------------
Arkansas 0.7%
2,130 Arkansas St Dev Fin Auth Single Family Mtg Rev Replacement Ser C ........ 8.600 02/01/17 2,280,059
2,645 Maumelle, AR Waterside Addition Muni Ppty Owners Multi-purp Impt Dist No
6 ....................................................................... 9.500 12/01/10 2,380,500
1,155 Maumelle, AR West Pointe Addition Muni Ppty Owners Multi-purp Impt Dist
No 7 .................................................................... 9.500 12/01/10 1,039,500
------------
5,700,059
------------
California 6.8%
1,310 California Edl Fac Auth Rev Univ of La Verne ............................ 6.375 04/01/13 1,349,510
2,250 California St Pub Wks Brd Lease Rev Dept Corrections CA St Prison Ser D
Susanville .............................................................. 5.375 06/01/18 2,173,163
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
8,000 California St Rfdg (Cap Guar Insd) <F3> ................................. 5.125 10/01/17 7,834,960
1,500 Colton, CA Pub Fin Auth Rev Elec Sys Impts .............................. 7.500 10/01/20 1,525,125
5,000 Contra Costa, CA Home Mtg Fin Auth Home Mtg Rev (MBIA Insd) ............. * 09/01/17 1,421,050
3,465 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the Arts (AMBAC
Insd) ................................................................... * 09/01/15 1,061,191
3,480 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the Arts (AMBAC
Insd) ................................................................... * 09/01/18 862,622
20,000 Foothill/Eastern Tran Agy Cap Apprec Sr Lien Ser A ...................... * 01/01/27 2,836,200
3,500 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi Cap Fac Proj IV
(MBIA Insd) ............................................................. 5.000 12/01/07 3,526,460
2,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi Cap Fac Proj IV ... 5.250 12/01/16 1,971,200
2,000 Metropolitan Wtr Dist Southern CA Wtrwks Rev ............................ 5.950 08/05/22 2,058,060
2,850 Riverside Cnty, CA Ctfs Partn Air Force Village West Inc A .............. 8.125 06/15/20 3,022,140
4,000 San Bernardino Cnty, CA Ctfs Partn Med Cent Fin Proj Ser A (MBIA Insd)... 5.500 08/01/15 3,997,400
7,395 San Diego, CA Swr Rev Ser A (AMBAC Insd) <F3> ........................... 5.000 05/15/13 7,230,831
4,000 San Francisco, CA City & Cnty Arpts Comm Intl Arpt Rev 2nd Ser Issue 8A
(FGIC Insd) ............................................................. 6.250 05/01/20 4,238,920
7,625 San Francisco, CA City & Cnty Redev Agy Lease Rev Gains (Crossover Rfdg
@ 07/01/04) <F7> ........................................................ 0/8.500 07/01/14 5,404,066
3,000 Westminster, CA Redev Agy Tax Alloc Rev Commercial Redev Proj No 1 ...... 6.200 08/01/23 3,034,590
------------
55,625,688
------------
</TABLE>
See Notes to Financial Statements
B-25
<PAGE> 426
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Colorado 9.2%
$ 12,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser C .......... *% 08/31/15 $ 3,113,880
19,000 Arapahoe Cnty, CO Cap Impt Trust Fund Hwy Rev E-470 Proj Ser C .......... * 08/31/26 2,095,890
66 Arapahoe Cnty, CO Centennial Downs Metro Dist Cash Payment Deficiency
Bond .................................................................... 8.090 12/01/34 63,044
336 Arapahoe Cnty, CO Centennial Downs Metro Dist Interest Certificate <F6>.. 6.00/8.09 12/01/34 319,369
650 Arapahoe Cnty, CO Centennial Downs Metro Dist Ltd Tax Bond Ser 1993 Rfdg. 8.090 12/01/34 617,869
1,000 Bowles Metro Dist CO <F2> ............................................... 7.750 12/01/15 996,990
6,470 Colorado Hlth Fac Auth Rev Christian Living Campus Proj ................. 10.500 01/01/19 7,075,139
6,200 Colorado Hlth Fac Auth Rev Christian Living Campus Proj ................. 9.000 01/01/25 6,541,248
2,982 Colorado Hlth Fac Auth Rev Univ Hills Christian Nursing Rfdg ............ 8.750 12/01/11 3,125,429
1,000 Colorado Hlth Fac Auth Rev Vail Vly Med Cent Proj Ser A Rfdg ............ 6.600 01/15/20 1,036,460
720 Colorado Hsg Fin Auth Single Family Residential Rev Ser C Rfdg .......... 8.750 09/01/17 770,803
1,000 Denver, CO City & Cnty Arpt Rev Ser A ................................... 6.900 11/15/98 1,061,210
1,175 Denver, CO City & Cnty Arpt Rev Ser A ................................... 8.400 11/15/98 1,291,971
3,000 Denver, CO City & Cnty Arpt Rev Ser A ................................... 8.875 11/15/12 3,576,900
5,000 Denver, CO City & Cnty Arpt Rev Ser A (MBIA Insd) ....................... 5.600 11/15/20 5,045,000
10,000 Denver, CO City & Cnty Arpt Rev Ser A ................................... 8.500 11/15/23 11,460,100
2,500 Denver, CO City & Cnty Arpt Rev Ser D ................................... 7.750 11/15/13 3,008,000
1,048 East River Regl Santn Dist CO Var Rfdg (Var Rate Cpn) ................... * 12/01/08 749,949
3,216 Gunnison Cnty, CO Indl Rev Bond Crested Butte Mtn Resort Inc ............ 9.250 10/01/07 3,250,668
4,408 Himalaya Wtr & Santn Dist Adams Cnty, CO Genl Oblig Ltd Tax Rfdg Bond
Ser 1995 ................................................................ 9.500 12/01/24 3,235,351
5,385 Littleton, CO Riverfront Auth Rev Rfdg <F5> ............................. 9.625 12/01/00 1,884,750
4,708 Skyland Metro Dist CO Gunnison Cnty Rfdg (Var Rate Cpn) ................. * 12/01/08 3,369,116
14,709 Tower Metro Dist Adams Cnty, CO Gen Oblig Ltd Tax Rfdg Bond Ser 1995 .... 9.500 12/01/24 10,796,447
------------
74,485,583
------------
Connecticut 0.5%
3,740 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home Pgm
AHF/Windsor Proj ........................................................ 7.125 11/01/24 4,322,505
------------
District of Columbia 1.3%
1,700 District of Columbia Ser A1 Rfdg (MBIA Insd) <F3> ....................... 6.500 06/01/10 1,952,535
2,000 District of Columbia Ser E (FSA Insd) ................................... 6.000 06/01/11 2,086,100
6,000 Metropolitan WA, DC Arpt Auth Genl Arpt Rev Ser A (MBIA Insd) ........... 5.875 10/01/15 6,207,360
------------
10,245,995
------------
Florida 7.2%
2,000 Collier Cnty, FL Indl Dev Auth Indl Dev Rev Rfdg <F2> ................... 6.500 10/01/25 1,949,940
28,000 Dade Cnty, FL Gtd Entitlement Rev Cap Apprec Ser A Rfdg (MBIA Insd) ..... * 02/01/18 7,869,680
5,265 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent .................... 10.250 07/01/11 5,594,694
2,215 Escambia Cnty, FL Rev ICF/MR Pensacola Care Dev Cent Ser A .............. 10.250 07/01/11 2,353,703
12,000 Florida Hsg Fin Agy Hsg Bradley Park Apts Proj <F5> ..................... 9.750 12/01/19 5,485,200
5,000 Florida St Division Bond Fin Dept Genl Services Rev Dept Envirnmtl
Presrvtn 2000 Ser A (MBIA Insd) ......................................... 4.900 07/01/13 4,882,300
290 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg .............................. 5.750 03/01/03 287,292
5,500 Miramar, FL Wastewater Impt Assmt Rev (FGIC Insd) ....................... 6.750 10/01/25 6,271,815
3,950 Monroe Cnty, FL Indl Dev Auth First Mtg Med Fac Rev Kennedy Dr Invt Ltd
Proj Rfdg ............................................................... 11.000 11/01/12 3,950,000
4,030 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 4,762,815
6,000 Sarasota Cnty, FL Hlth Fac Auth Hlth Fac Sunnyside Pptys <F2> ........... 6.700 07/01/25 5,747,880
16,065 Sun N Lake of Sebring, FL Impt Dist Spl Assmt Ser A <F5> ................ 10.000 12/15/11 9,478,350
------------
58,633,669
------------
</TABLE>
See Notes to Financial Statements
B-26
<PAGE> 427
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Georgia 1.7%
$ 15,000 Atlanta, GA Urban Residential Fin Auth Multi Family Mtg Rev Hsg
Peachtree Apts Proj <F5> ................................................ 10.500% 12/01/10 $ 14,125,500
------------
Idaho 1.7%
8,000 Idaho Hlth Fac Auth Rev IHC Hosp Inc Rfdg (Inverse Fltg) ................ 6.760 02/15/21 9,031,440
4,300 Owyhee Cnty, ID Indl Dev Corp Indl Dev Rev Envirosafe Services of ID Inc. 8.250 11/01/02 4,471,742
------------
13,503,182
------------
Illinois 13.1%
1,000 Alton, IL Hosp Fac Rev Saint Anthony's Hlth Cent Proj ................... 8.375 09/01/14 1,089,400
1,950 Bridgeview, IL Tax Increment Rev Rfdg ................................... 9.000 01/01/11 2,124,974
3,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev American Airls Inc Proj Ser A .. 7.875 11/01/25 3,277,920
24,875 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Proj Ser
84A <F3> ................................................................ 8.850 05/01/18 28,327,650
2,775 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B ......... 8.950 05/01/18 3,189,252
4,250 Chicago, IL Rev Chatham Ridge Tax Increment ............................. 10.250 01/01/07 4,676,700
10,000 Chicago, IL Wastewater Transmission Rev (FGIC Insd) ..................... 5.125 01/01/25 9,706,200
2,000 Huntley, IL Incrmnt Alloc <F2> .......................................... 8.500 12/01/15 2,000,000
7,375 Illinois Dev Fin Auth Rev Mercy Hsg Corp Proj Rfdg ...................... 7.000 08/01/24 7,922,372
5,000 Illinois Dev Fin Auth Rev Sch Dist Pgm No 300 (FGIC Insd) ............... * 12/01/07 2,771,800
6,010 Illinois Dev Fin Auth Rev Sch Dist Pgm No 300 (FGIC Insd) ............... * 12/01/08 3,127,183
4,890 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ...................... 9.500 11/15/15 5,812,303
3,825 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D (Prerefunded @11/15/00) 9.500 11/15/15 4,777,731
1,000 Illinois Hlth Fac Auth Rev Lifelink Corp Oblig Group B .................. 8.000 02/15/25 1,043,890
5,000 Illinois Hlth Fac Auth Rev Midwest Physician Group Ltd Proj ............. 8.100 11/15/14 5,430,150
995 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A ......... 10.250 02/01/13 994,980
3,000 Illinois Hlth Fac Auth Rev Rfdg Fairview Oblig Group Ser A .............. 7.400 08/15/23 2,985,630
3,000 Illinois Hlth Fac Auth Rev Servantcor Ser A (Prerefunded @ 08/15/01) .... 8.000 08/15/21 3,581,610
1,250 Mill Creek Wtr Reclamation Dist IL Sewage Rev ........................... 8.000 03/01/10 1,282,225
750 Mill Creek Wtr Reclamation Dist IL Wtrwks Rev ........................... 8.000 03/01/10 769,335
2,095 Regional Tran Auth IL Ser B (AMBAC Insd) ................................ 8.000 06/01/17 2,825,673
8,000 Robbins, IL Res Recovery Rev Robbins Res Recovery Partners Ser A ........ 9.250 10/15/14 8,733,360
------------
106,450,338
------------
Kansas 0.1%
3,450 Kansas City, KS Crawford Cnty Leavenworth Single Family Mtg
Rev (AMBAC Insd) <F3> ................................................... * 04/01/16 374,394
Kentucky 1.0%
5,025 Boone Cnty, KY Pollutn Ctl Rev Collateral Cincinnati Gas & Elec
Ser A Rfdg (MBIA Insd) .................................................. 5.500 01/01/24 5,053,793
2,700 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj (Inverse Fltg)
(MBIA Insd) <F3> ........................................................ 8.394 10/01/08 3,179,250
------------
8,233,043
------------
Louisiana 1.6%
2,500 Louisiana Hsg Fin Agy Mtg Rev Single Family Ser C1 Rfdg (MBIA Insd) ..... 5.750 06/01/17 2,504,275
3,000 Louisiana Pub Fac Auth Rev Student Ln Subser A3 ......................... 7.000 09/01/06 3,250,500
12,500 New Orleans, LA Rfdg (AMBAC Insd) ....................................... * 09/01/17 3,865,000
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ............................. * 02/01/15 3,490,900
------------
13,110,675
------------
Maine 0.2%
1,250 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) .................... 7.000 07/01/24 1,435,563
------------
</TABLE>
See Notes to Financial Statements
B-27
<PAGE> 428
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maryland 1.9%
$ 7,500 Baltimore, MD Cap Apprec Cons Pub Impt Ser A (FGIC Insd) ................... *% 10/15/11 $ 3,097,275
8,000 Gaithersburg, MD Hosp Fac Rev Shady Grove Rfdg & Impt (FSA Insd) ........... 5.500 09/01/15 8,016,400
1,440 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Multi Family Hsg Rev Ser A
Rfdg ....................................................................... 8.300 05/15/17 1,514,650
1,750 Maryland St Cmnty Dev Admin Dept Hsg & Cmnty Dev Rev Single
Family Pgm Seventh Ser ..................................................... 7.300 04/01/25 1,864,152
1,000 Maryland St Energy Fin Admin Ltd Oblig Rev ................................. 7.400 09/01/19 1,058,420
------------
15,550,897
------------
Massachusetts 5.4%
13,770 Canton, MA Hsg Auth Multi Family Hsg Mtg Rev Canton Arboretum Apts
(Var Rate Cpn) ............................................................. 6.500 09/01/19 13,081,500
5,000 Massachusetts St Hlth & Edl Fac Auth Rev New England Med Cent Hosp Ser G
(Embedded Swap) (MBIA Insd) ................................................ 3.100 07/01/13 4,290,800
1,670 Massachusetts St Hlth & Edl Fac Auth Rev Saint Annes Hosp Ser A ............ 9.375 07/01/14 1,676,329
10,415 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent Ser A .......... 6.000 10/01/23 8,466,979
1,385 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent Ser A Rfdg ..... 5.500 10/01/02 1,266,139
2,200 Massachusetts St Hsg Fin Agy Hsg Rev Insd Rental Ser A Rfdg (AMBAC Insd) ... 6.650 07/01/19 2,322,540
640 Massachusetts St Hsg Fin Agy Hsg Rev Ser A ................................. 9.000 12/01/18 679,379
575 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent .................. 8.000 12/01/06 598,092
1,085 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent .................. 8.375 12/01/13 1,148,049
675 Massachusetts St Indl Fin Agy Rev Dimmock Cmnty Hlth Cent .................. 8.500 12/01/20 715,507
7,300 Massachusetts St Indl Fin Agy Rev Swr Fac Res Ctl Composting ............... 9.250 06/01/10 7,963,424
1,525 Massachusetts St Indl Fin Agy Solid Waste Disp Rev Res Recovery Sys ........ 9.200 12/01/99 1,543,178
------------
43,751,916
------------
Michigan 4.2%
2,000 Battle Creek, MI Downtown Dev Auth Tax Increment Rev ....................... 7.600 05/01/16 2,249,340
3,955 Detroit, MI Wtr Supply Sys Rev Second Lien Bonds Ser A (MBIA Insd) ......... 5.500 07/01/25 3,962,792
8,100 Meridian, MI Econ Dev Corp Ltd Oblig Rev First Mtg Burcham Hills Ser A ..... 9.625 07/01/19 8,721,918
3,380 Michigan St Hosp Fin Auth Rev Garden City Hosp ............................. 8.300 09/01/02 3,592,061
1,000 Michigan St Hosp Fin Auth Rev Hosp Sinai Hosp Rfdg ......................... 6.700 01/01/26 1,012,330
10,000 Michigan St Strategic Fund Ltd Oblig Rev Great Lakes Pulp & Fibre Proj ..... 10.250 12/01/16 10,578,200
1,500 North Branch, MI Area Sch Lapeer Cnty Rfdg (AMBAC Insd) <F3> ............... 5.250 05/01/13 1,505,940
1,495 Pontiac, MI Hosp Fin Auth Hosp Rev NOMC Oblig Group Rfdg ................... 6.000 08/01/13 1,412,745
800 Saint Clair Cnty, MI Econ Dev Corp Kmart Proj .............................. 9.500 02/01/06 800,104
------------
33,835,430
------------
Minnesota 2.9%
5,490 Eden Prairie, MN Multi Family Hsg Rev Sterling Ponds Proj Ser A ............ 10.000 01/15/20 4,950,333
495 Eden Prairie, MN Multi Family Hsg Rev Sterling Ponds Proj Ser B ............ * 01/15/20 685,699
2,800 Minneapolis, MN Coml Dev Rev Holiday Inn Metrodome Proj Rfdg ............... 10.000 06/01/98 2,840,180
1,750 Minnesota St Hsg Fin Agy Single Family Mtg Ser D ........................... 8.800 07/01/16 1,874,530
25,460 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A (MBIA Insd) .............. * 01/01/20 7,183,539
5,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A (MBIA Insd) .............. * 01/01/21 1,336,350
21,160 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A (MBIA Insd) .............. * 01/01/23 5,074,379
------------
23,945,010
------------
Mississippi 0.1%
1,000 Claiborne Cnty, MS Pollutn Ctl Rev Sys Energy Res Inc Rfdg ................. 7.300 05/01/25 1,048,290
------------
Missouri 1.1%
1,000 Jefferson Cnty, MO Indl Dev Auth Indl Rev Cedars Hlthcare Cent
Proj Ser A Rfdg ............................................................ 8.250 12/01/15 1,005,910
1,250 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Saint Lukes Hlth Sys Rfdg
(MBIA Insd) ................................................................ 5.125 11/15/19 1,201,675
4,925 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Skaggs Cmnty Hosp Rfdg ........ 9.500 05/15/13 5,270,981
</TABLE>
See Notes to Financial Statements
B-28
<PAGE> 429
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Missouri (Continued)
$ 905 Oak Grove, MO Combined Wtrwks & Swr Sys Rev Rfdg (Prerefunded @ 11/01/96). 9.250% 11/01/07 $ 973,282
615 Oak Grove, MO Combined Wtrwks & Swr Sys Rev Rfdg (Prerefunded @ 11/01/96). 9.375 11/01/12 661,999
-----------
9,113,847
-----------
Montana 0.5%
4,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj ......... 7.000 12/31/19 3,940,640
-----------
Nebraska 0.8%
2,500 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg)
(GNMA Collateralized) <F3> ............................................... 9.609 10/17/23 2,803,125
3,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) (GNMA
Collateralized) <F3> ..................................................... 10.923 09/10/30 3,712,000
-----------
6,515,125
-----------
Nevada 0.2%
1,945 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .............. 5.600 09/01/09 1,892,543
-----------
New Hampshire 1.4%
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Havenwood Heritage Heights... 7.350 01/01/18 2,040,740
2,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Havenwood Heritage Heights... 7.450 01/01/25 2,038,920
4,000 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp Catholic Med Cent Rfdg.. 8.250 07/01/13 4,377,640
3,000 New Hampshire St Indl Dev Auth Rev Pollutn Ctl Pub Svcs Co NH Proj C ..... 7.650 05/01/21 3,192,030
-----------
11,649,330
-----------
New Jersey 0.9%
6,710 New Jersey Econ Dev Auth First Mtg Gross Rev Oakridge Manor Proj Rfdg .... 9.500 11/01/14 7,087,035
-----------
New Mexico 0.5%
5,835 Albuquerque, NM Retirement Fac Rev OGL Retirement Fac Rfdg <F4> .......... 10.000 10/01/13 4,261,884
-----------
New York 8.4%
1,500 New York City Indl Dev Agy Rev Visy Paper Inc Proj <F2> .................. 7.950 01/01/28 1,534,695
1,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A .................. 5.500 06/15/23 985,340
12,225 New York City Ser B Rfdg ................................................. 6.375 08/15/10 12,770,357
2,500 New York City Ser C Rfdg ................................................. 6.500 08/01/04 2,638,550
3,000 New York City Ser D ...................................................... 6.000 02/15/15 2,994,660
3,000 New York City Ser D Rfdg ................................................. 8.000 02/01/05 3,479,340
1,335 New York City Ser D Rfdg ................................................. 6.000 08/01/07 1,350,913
3,000 New York City Ser F <F2> ................................................. 5.750 02/01/12 2,974,980
5,000 New York St Dorm Auth Rev Saint Vincents Hosp & Med Cent (AMBAC Insd) .... 5.800 08/01/25 5,172,550
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) ............ 8.295 04/01/20 2,846,875
6,000 New York St Energy Resh & Dev Auth Gas Fac Rev Ser D (Inverse Fltg) (MBIA
Insd) .................................................................... 5.635 07/08/26 6,041,580
225 New York St Energy Resh & Dev Auth St Svc Contract Rev Western NY Nuclear
Svc Cent B ............................................................... 5.500 04/01/00 229,937
1,000 New York St Energy Resh & Dev Auth St Svc Contract Rev Western NY Nuclear
Svc Cent B ............................................................... 5.500 04/01/01 1,018,150
750 New York St Energy Resh & Dev Auth St Svc Contract Rev Western NY Nuclear
Svc Cent B ............................................................... 5.250 04/01/02 750,330
5,000 New York St Loc Govt Assistance Corp Ser C ............................... 5.500 04/01/22 4,927,800
10,000 New York St Med Care Fac Fin Agy Rev Presbyterian Hosp Ser A Rfdg (MBIA
Insd) .................................................................... 5.375 02/15/25 9,897,600
1,500 New York St Thruway Auth Hwy & Brdg Tr Fund Ser A ........................ 6.000 04/01/14 1,581,495
</TABLE>
See Notes to Financial Statements
B-29
<PAGE> 430
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)
$ 3,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis Cent Proj
(FSA Insd) ................................................................. 6.250% 11/15/06 $ 3,344,850
1,500 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis Cent Proj
(FSA Insd) ................................................................. 6.375 11/15/07 1,674,270
2,000 New York, NY City Indl Dev Agy Civic Fac Rev USTA Natl Tennis Cent Proj
(FSA Insd) ................................................................. 6.500 11/15/09 2,227,160
------------
68,441,432
------------
North Carolina 1.6%
8,450 Eastern Band Cherokee Indians NC Spl Oblig Rev Carolina Mirror Co Proj ..... 10.250 09/01/09 8,450,000
4,500 Martin Cnty, NC Indl Fac & Pollutn Ctl Fin Auth Rev ........................ 6.000 11/01/25 4,575,105
------------
13,025,105
------------
North Dakota 0.3%
2,100 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph Hosp Corp Proj ................. 8.875 11/15/24 2,353,407
------------
Ohio 3.0%
2,000 East Liverpool, OH Hosp Rev East Liverpool City Hosp Ser A ................. 8.125 10/01/11 2,147,420
1,685 Franklin Cnty, OH First Mtg Rev Heinzerling Fndtn Proj Rfdg (Prerefunded @
08/01/96) .................................................................. 10.000 08/01/11 1,767,127
7,850 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) (GNMA
Collateralized) ............................................................ 9.477 03/31/31 8,684,062
1,200 Ohio St Solid Waste Rev Republic Engineered Steels Proj .................... 8.250 10/01/14 1,218,876
8,500 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College Cleveland Elec Ser A Rfdg.. 8.000 10/01/23 9,228,620
1,500 Sandusky Cnty, OH Hosp Fac Rev Mem Hosp Proj ............................... 7.750 12/01/09 1,531,335
------------
24,577,440
------------
Oklahoma 0.8%
2,000 Oklahoma City, OK Indl & Cultr Hlth Fac (MBIA Insd) ........................ 5.875 06/01/21 2,080,960
4,000 Tulsa, OK Indl Auth Hosp Rev Tulsa Regional Med Cent ....................... 7.200 06/01/17 4,571,160
------------
6,652,120
------------
Pennsylvania 5.7%
2,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral Toledo
Edison Co Proj Rfdg ........................................................ 7.625 05/01/20 2,145,060
1,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Collateral Toledo Edison Co
Ser A Rfdg ................................................................. 7.750 05/01/20 1,084,750
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
4,000 Cambria Cnty, PA Indl Dev Auth Pollutn Ctl Rev Bethlehem Steel Corp Proj
Rfdg ....................................................................... 7.500 09/01/15 4,218,800
2,000 Cumberland Cnty, PA Auth Rev First Mtg Carlisle Hosp & Hlth ................ 6.800 11/15/14 2,072,920
3,000 Lancaster Cnty, PA Solid Waste Mgmt Auth Res Recovery Sys Rev Ser A <F3> ... 8.500 12/15/10 3,248,250
2,000 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj (Crossover Rfdg @
10/01/00) .................................................................. 8.875 10/01/20 2,403,000
3,800 Montgomery Cnty, PA Higher Edl & Hlth Auth Nursing Home Rev Delco Sys Svcs
Proj A ..................................................................... 9.875 11/01/18 3,860,344
8,100 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg Meadowood Corp Proj A
(Prerefunded @ 12/01/00) ................................................... 10.000 12/01/19 10,177,002
500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg .... 7.000 12/01/10 511,735
2,500 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg .... 7.250 12/01/15 2,521,625
6,000 Montgomery Cnty, PA Indl Dev Auth Rev First Mtg The Meadowood Corp Rfdg .... 7.400 12/01/20 6,027,780
3,000 Pennsylvania Econ Dev Fin Auth Exempt Fac Rev Macmillan Ltd Partnership
Proj ....................................................................... 7.600 12/01/20 3,373,710
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 431
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pennsylvania (Continued)
$ 1,500 Pennsylvania Econ Dev Fin Auth Recycling Rev Ponderosa Fibres Proj Ser A .. 9.250% 01/01/22 $ 1,566,300
1,000 Philadelphia, PA Auth for Indl Dev Rev Long Term Care ..................... 8.000 01/01/24 1,078,120
------------
46,369,596
------------
Rhode Island 0.3%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ................................. 8.000 09/01/24 2,219,900
------------
South Carolina 0.5%
2,500 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) .......................... 7.000 06/01/19 2,877,800
1,000 Oconee Cnty, SC Indl Rev Bond Johnson Ctl Inc Ser 84 (Var Rate Cpn) ....... 6.344 06/15/04 1,010,000
------------
3,887,800
------------
Tennessee 3.7%
3,000 SCA Tax Exempt Trust Multi Family Mtg Memphis Hlth Edl Rev
Bond Receipt A6 (FSA Insd) ................................................ 7.350 01/01/30 3,271,740
4,665 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms Dev Cent Ser A. 9.750 08/01/19 5,126,275
4,725 Shelby Cnty, TN Hlth Edl & Hsg Fac Brd Rev ICF/MR Open Arms Dev Cent Ser C. 9.750 08/01/19 5,192,208
2,500 Shelby Cnty, TN Hlth Edl Hosp Methodist Hlth Sys Inc ...................... 5.500 08/01/12 2,556,900
2,500 Shelby Cnty, TN Hlth Edl Hosp Methodist Hlth Sys Inc (MBIA Insd) .......... 5.250 08/01/15 2,474,250
6,155 Sullivan Cnty, TN Hlth Edl & Hsg Fac Brd Rev First Mtg RHA/Sullivan Inc
Fac Rev ................................................................... 9.750 09/01/19 6,780,164
4,505 Trenton, TN Hlth & Edl Fac Brd Rev ICF/MR RHA/Trenton Golden Door <F3> .... 10.000 05/01/19 4,963,834
------------
30,365,371
------------
Texas 3.9%
2,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) <F3> ............................................ 8.683 01/01/22 2,295,000
3,905 Brazos, TX Higher Ed Auth Inc Student Ln Rev Subser C2 Rfdg ............... 5.875 06/01/04 4,037,028
665 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. * 08/01/00 474,338
1,165 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. * 08/01/01 771,160
335 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. * 08/01/02 205,579
1,825 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. * 08/01/11 566,243
775 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. 8.750 08/01/11 847,401
2,670 Dallas Cnty, TX Flood Ctl Dist No 1 Rfdg .................................. 8.750 08/01/12 2,919,431
2,500 Garland, TX Indl Dev Auth Rev Bond Ashland Oil Proj Ser 84 Rfdg (Var Rate
Cpn) ...................................................................... 5.525 04/01/04 2,539,025
2,829 Texas Genl Svcs Comm Partn Int Lease Pur Ctfs ............................. 7.250 08/15/11 2,901,329
3,858 Texas St .................................................................. 6.350 12/01/13 3,965,005
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll Tunnel Proj
(FGIC Insd) ............................................................... 6.750 01/01/15 2,273,020
2,000 Texas St Tpk Auth Dallas North Thruway Rev Addison Arpt Toll Tunnel Proj
(FGIC Insd) ............................................................... 6.600 01/01/23 2,236,020
5,000 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp Union Carbide Chem
& Plastics <F3> ........................................................... 8.200 03/15/21 5,711,050
------------
31,741,629
------------
Utah 0.7%
1,000 Hilldale, UT Elec Rev <F2> ................................................ 7.800 09/01/15 976,880
1,165 Hilldale, UT Elec Rev <F2> ................................................ 8.000 09/01/20 1,154,888
1,000 Hilldale, UT Elec Rev <F2> ................................................ 7.800 09/01/25 968,480
290 Saint George, UT Indl Dev Rev Kmart Corp Ser A 1984 ....................... 10.750 10/15/08 282,492
230 Utah St Hsg Fin Agy Single Family Mtg Sr Bond Ser A ....................... 8.400 07/01/08 246,995
1,925 Utah St Hsg Fin Agy Single Family Mtg Sr Bond Ser G2 (FHA Gtd) ............ 7.600 01/01/27 2,033,358
------------
5,663,093
------------
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 432
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Virginia 1.4%
$ 2,650 Fairfax Cnty, VA Park Auth Park Fac Rev ............................... 6.625% 07/15/20 $ 2,805,449
3,000 Loudoun Cnty, VA Indl Dev Auth (FSA Insd) ............................. 5.800 06/01/20 3,094,710
5,310 Upper Occoquan Sewage Auth VA Regl Sewage Rev Rfdg (FGIC Insd) ........ 5.000 07/01/15 5,177,622
------------
11,077,781
------------
Washington 0.1%
1,000 Port Walla Walla, WA Pub Corp Solid Waste Recycling Rev
Ponderosa Fibres Proj ................................................. 9.125 01/01/26 1,037,300
------------
Wisconsin 1.2%
4,340 Wisconsin St Hlth & Edl Fac Auth Rev Chippewa Vly Hosp Ser F Rfdg ..... 9.500 11/15/12 5,146,198
2,235 Wisconsin St Hlth & Edl Fac Auth Rev Eau Claire Manor Refin ........... 9.625 06/01/13 2,330,323
1,975 Wisconsin St Hlth & Edl Fac Auth Rev Hess Mem Hosp Assn ............... 7.875 11/01/22 2,006,738
------------
9,483,259
------------
Puerto Rico 0.2%
2,000 Puerto Rico Elec Pwr Auth Pwr Rev Rfdg Ser Z .......................... 5.250 07/01/21 1,935,860
------------
Total Long-Term Investments 99.8%
(Cost $772,772,076) <F1>.......................................................................... 811,778,662
Short-Term Investments at Amortized Cost 0.3%...................................................... 2,696,750
Liabilities in Excess of Other Assets (0.1%)....................................................... (1,208,180)
------------
Net Assets 100%.................................................................................... $813,267,232
============
*Zero coupon bond
<FN>
<F1> At December 31, 1995, for federal income tax purposes, cost is
$774,772,307, the aggregate gross unrealized appreciation is $62,547,716
and the aggregate gross unrealized depreciation is $25,509,672, resulting
in net unrealized appreciation including open futures transactions of
$37,038,044.
<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> Security is producing income of less than the stated coupon.
<F5> Non-Income producing security.
<F6> Currently is a payment-in-kind security which will convert to a cash
paying security with a higher coupon at a predetermined date.
<F7> Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
</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.
<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
AAA........................... 29.0%
AA............................ 2.7
A............................. 4.9
BBB........................... 17.2
BB............................ 6.9
B............................. 1.4
Non-Rated..................... 37.9
------
100.0%
======
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 433
Statement of Assets and Liabilities
December 31, 1995
<TABLE>
- --------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $772,772,076) (Note 1).............................. $ 811,778,662
Short-Term Investments (Note 1)........................................................ 2,696,750
Cash................................................................................... 2,522,019
Receivables:
Interest............................................................................. 17,240,607
Fund Shares Sold..................................................................... 1,594,211
Investments Sold..................................................................... 375,000
Other.................................................................................. 34,108
--------------
Total Assets...................................................................... 836,241,357
==============
Liabilities:
Payables:
Investments Purchased................................................................ 18,173,566
Income Distributions................................................................. 2,348,560
Fund Shares Repurchased ............................................................. 806,442
Investment Advisory Fee (Note 2)..................................................... 329,141
Margin on Futures (Note 5)........................................................... 26,602
Accrued Expenses....................................................................... 1,289,814
--------------
Total Liabilities................................................................. 22,974,125
--------------
Net Assets............................................................................. $ 813,267,232
==============
Net Assets Consist of:
Capital (Note 3)....................................................................... $ 862,907,580
Net Unrealized Appreciation on Investments............................................. 39,038,275
Accumulated Distributions in Excess of Net Investment Income (Note 1).................. (8,760,023)
Accumulated Net Realized Loss on Investments........................................... (79,918,600)
--------------
Net Assets............................................................................. $ 813,267,232
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$665,822,295 and 44,433,895 shares of capital stock issued and outstanding)(Note 3) $ 14.98
Maximum sales charge (4.75%* of offering price)................................... .75
--------------
Maximum offering price to public.................................................. $ 15.73
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $137,933,467
and 9,205,700 shares of capital stock issued and outstanding) (Note 3)............ $ 14.98
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $9,511,470
and 634,649 shares of capital stock issued and outstanding) (Note 3).............. $ 14.99
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-33
<PAGE> 434
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest.................................................................................. $ 61,183,874
----------------
Expenses:
Investment Advisory Fee (Note 2).......................................................... 3,705,007
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $1,464,858,
$1,236,172, $80,827 and $1,586, respectively) (Note 6) ................................. 2,783,443
Shareholder Services (Note 2)............................................................. 820,689
Legal (Note 2) ........................................................................... 283,400
Trustees Fees and Expenses (Note 2)....................................................... 43,316
Other..................................................................................... 632,738
----------------
Total Expenses....................................................................... 8,268,593
Less Expenses Reimbursed............................................................. 13,125
----------------
Net Expenses......................................................................... 8,255,468
----------------
Net Investment Income..................................................................... $ 52,928,406
================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales..................................................................... $ 427,357,154
Cost of Securities Sold (Including reorganization and restructuring costs of $777,059).. (445,800,940)
----------------
Net Realized Loss on Investments (Including realized gain on closed and expired option
transactions of $506,568 and realized loss on futures transactions of $7,466,141)....... (18,443,786)
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period................................................................. (36,382,788)
End of the Period (Including unrealized appreciation on open futures transactions of
$31,689)............................................................................. 39,038,275
----------------
Net Unrealized Appreciation on Investments During the Period.............................. 75,421,063
----------------
Net Realized and Unrealized Gain on Investments........................................... $ 56,977,277
================
Net Increase in Net Assets from Operations................................................ $ 109,905,683
================
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 435
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................................................ $ 52,928,406 $ 46,265,509
Net Realized Loss on Investments..................................... (18,443,786) (55,616,722)
Net Unrealized Appreciation/Depreciation on Investments
During the Period.................................................. 75,421,063 (28,618,923)
---------------- -----------------
Change in Net Assets from Operations ................................ 109,905,683 (37,970,136)
----------------- -----------------
Distributions from Net Investment Income............................. (49,750,600) (46,265,509)
Distributions in Excess of Net Investment Income (Note 1)............ -0- (3,817,529)
----------------- -----------------
Total Distributions from and in Excess of Net Investment Income*... (49,750,600) (50,083,038)
----------------- -----------------
Net Change in Net Assets from Investment Activities.................. 60,155,083 (88,053,174)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold............................................ 98,267,869 185,185,601
Net Asset Value of Shares Issued Through Dividend Reinvestment....... 21,929,512 22,347,994
Cost of Shares Repurchased........................................... (92,025,233) (92,646,623)
----------------- -----------------
Net Change in Net Assets from Capital Transactions................... 28,172,148 114,886,972
----------------- -----------------
Total Increase in Net Assets......................................... 88,327,231 26,833,798
Net Assets:
Beginning of the Period.............................................. 724,940,001 698,106,203
----------------- -----------------
End of the Period (Including undistributed net investment income
of $(8,760,023) and $(11,937,829), respectively)................... $ 813,267,232 $ 724,940,001
================= =================
</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...................... $ (42,013,439) $ (43,955,918)
Class B Shares...................... (7,196,226) (5,542,863)
Class C Shares...................... (469,250) (476,352)
Class D Shares...................... (71,685) (107,905)
-------------- --------------
$ (49,750,600) $ (50,083,038)
============== ==============
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 436
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............................... $ 13.848 $ 15.629 $ 14.529 $ 15.687 $ 15.632
-------- ---------- --------- --------- ---------
Net Investment Income................................................ 1.024 .956 1.052 1.064 1.173
Net Realized and Unrealized
Gain/Loss on Investments.......................................... 1.072 (1.717) 1.158 (1.047) .097
-------- ---------- --------- --------- ---------
Total from Investment Operations....................................... 2.096 (.761) 2.210 .017 1.27
Less Distributions from and in Excess of Net
Investment
Income (Note 1)....................................................... 960 1.020 1.110 1.175 1.215
-------- ---------- --------- --------- ---------
Net Asset Value, End of the Period..................................... $ 14.984 $ 13.848 $ 15.629 $ 14.529 $ 15.687
======== ========== ========= ========= =========
Total Return........................................................... 15.52% (4.93%) 15.82% .08% 8.51%
Net Assets at End of the Period (In millions).......................... $ 665.8 $ 603.0 $ 636.2 $ 566.1 $ 626.7
Ratio of Expenses to Average Net Assets*............................... .95% .87% 1.03% 1.08% 1.09%
Ratio of Net Investment Income to Average Net Assets*.................. 7.05% 6.48% 6.95% 7.07% 7.54%
Portfolio Turnover..................................................... 58.76% 101.11% 90.82% 44.48% 65.39%
</TABLE>
* The Ratios of Expenses and Net Investment Income to Average Net
Assets were not affected by the assumption of expenses by VKAC
See Notes to Financial Statements
B-36
<PAGE> 437
Financial Highlights (continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
May 1, 1993
(Commencement of
Year Ended Distribution) to Year Ended
Class B Shares December 31, 1995 December 31, 1994 December 31, 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................ $ 13.850 $ 15.621 $ 14.670
------------ ---------- ---------
Net Investment Income................................................. .908 .841 .656
Net Realized and Unrealized Gain/Loss on Investments.................... 1.071 (1.718) .945
------------ ---------- ---------
Total from Investment Operations........................................ 1.979 (.877) 1.601
Less Distributions from and in Excess of Net
Investment Income (Note 1)............................................ .846 .894 .650
------------ ---------- ---------
Net Asset Value, End of the Period...................................... $ 14.983 $ 13.850 $ 15.621
============ ========== =========
Total Return............................................................ 14.62% (5.69%) 11.12%**
Net Assets at End of the Period (In millions)........................... $ 137.9 $ 112.4 $ 56.6
Ratio of Expenses to Average Net Assets*................................ 1.70% 1.64% 1.74%
Ratio of Net Investment Income to Average Net Assets*................... 6.25% 5.70% 5.95%
Portfolio Turnover...................................................... 58.76% 101.11% 90.82%
</TABLE>
* The Ratios of Expenses and Net Investment Income to Average Net
Assets were not affected by the assumption of expenses by VKAC.
** Non-Annualized
See Notes to Financial Statements
B-37
<PAGE> 438
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 Distribution) to Year Ended
Class C Shares December 31, 1995 December 31, 1994 December 31, 1993
- -------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................ $ 13.846 $ 15.610 $ 15.030
-------- -------- --------
Net Investment Income................................................... .910 .824 .369
Net Realized and Unrealized Gain/Loss on Investments ................... 1.077 (1.694) .580
-------- -------- --------
Total from Investment Operations........................................ 1.987 (.870) .949
Less Distributions from and in Excess of Net Investment
Income (Note 1)....................................................... .846 .894 .369
-------- -------- --------
Net Asset Value, End of the Period...................................... $ 14.987 $ 13.846 $ 15.610
======== ======== ========
Total Return............................................................ 14.70% (5.62%) 6.37%**
Net Assets at End of the Period (In millions)........................... $ 9.5 $ 7.6 $ 5.2
Ratio of Expenses to Average Net Assets*................................ 1.69% 1.64% 1.82%
Ratio of Net Investment Income to Average Net Assets*................... 6.19% 5.71% 5.21%
Portfolio Turnover...................................................... 58.76% 101.11% 90.82%
</TABLE>
* The Ratios of Expenses and Net Investment Income to Average Net
Assets were not affected by the assumption of expenses by VKAC.
** Non-Annualized
See Notes to Financial Statements
B-38
<PAGE> 439
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen American Capital Tax Free High Income Fund (the "Fund") is organized
as a series of the Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "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 investors with a high
level of current income exempt from federal income taxes primarily through
investment in a diversified portfolio of medium and lower grade municipal
securities. The Fund commenced investment operations on June 28, 1985. The
distribution of the Fund's Class B and Class C shares commenced on May 1, 1993
and August 13, 1993, respectively. On July 7, 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.
Investments valued using estimates of market value are generally those
non-rated securities in which the Fund owns over 90% of the original bond
issue. At December 31, 1995, 17% of the Fund's net assets consisted of such
securities. 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 is 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. 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 $73,224,534. Of this amount, $1,295,852,
$42,680,935 and $29,247,747 will expire on December 31, 1999, 2002 and 2003,
respectively. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of the deferral of post October 31
losses and the capitalization of reorganization and restructuring costs for tax
purposes.
B-39
<PAGE> 440
Notes to Financial Statements (Continued)
December 31, 1995
E. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. 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
distributions 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, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ---------------------------------------------------------------------------
<S> <C>
First $500 million ............................................ .50 of 1%
Over $500 million ............................................. .45 of 1%
</TABLE>
For the year ended December 31, 1995, the Fund recognized expenses of
approximately $27,000 representing legal services provided by 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 $224,000 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") 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 $342,000,
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 $39,900.
At December 31, 1995, VKAC owned 100 shares each of Classes B and C.
B-40
<PAGE> 441
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 $715,993,345, $137,196,174 and
$9,718,061 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........................ 4,222,270 $ 59,289,997
Class B........................ 2,414,527 35,122,032
Class C........................ 265,279 3,855,840
Class D........................ -0- -0-
---------- ------------
Total Sales.................... 6,902,076 $ 98,267,869
========== ============
Dividend Reinvestment:
Class A........................ 1,304,961 $ 18,980,521
Class B........................ 181,510 2,642,279
Class C........................ 21,072 306,708
Class D........................ -0- 4
---------- ------------
Total Dividend Reinvestment.... 1,507,543 $ 21,929,512
========== ============
Repurchases:
Class A........................ (4,634,819) $(65,107,747)
Class B........................ (1,504,466) (21,894,277)
Class C........................ (197,847) (2,860,089)
Class D........................ (147,327) (2,163,120)
---------- ------------
Total Repurchases.............. (6,484,459) $(92,025,233)
========== ============
</TABLE>
B-41
<PAGE> 442
Notes to Financial Statements (Continued)
December 31, 1995
At December 31, 1994, capital aggregated $702,830,574, $121,326,140,
$8,415,602 and $2,163,116 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ....................... 6,540,259 $ 96,207,344
Class B ....................... 5,443,468 79,716,260
Class C........................ 489,407 7,098,890
Class D........................ 147,327 2,163,107
---------- ------------
Total Sales.................... 12,620,461 $185,185,601
========== ============
Dividend Reinvestment:
Class A ....................... 1,375,201 $ 19,853,939
Class B ....................... 153,310 2,201,274
Class C........................ 20,355 292,772
Class D........................ -0- 9
---------- ------------
Total Dividend Reinvestment.... 1,548,866 $ 22,347,994
========== ============
Repurchases:
Class A ....................... (5,083,863) $(72,707,633)
Class B ....................... (1,108,781) (15,819,604)
Class C........................ (298,471) (4,119,386)
Class D........................ -0- -0-
---------- ------------
Total Repurchases.............. (6,491,115) $(92,646,623)
========== ============
</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
$203,200 and CDSC on the redeemed shares of Classes B and C of approximately
$434,900. Sales charges do not represent expenses of the Fund.
B-42
<PAGE> 443
Notes to Financial Statements (Continued)
December 31, 1995
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 $438,831,202 and $442,773,880, 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).................. 7,754 (1,872,675)
Options Terminated in Closing
Transactions (Net)................................. (3,976) 922,105
Options Expired (Net)................................ (3,228) 815,661
Options Exercised (Net).............................. (550) 134,909
------- -----------
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 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................................... 10,586
Futures Opened..................................................... 13,959
Futures Closed..................................................... (23,645)
-------
Outstanding at December 31, 1995................................... 900
=======
</TABLE>
B-43
<PAGE> 444
Notes to Financial Statements (Continued)
December 31, 1995
The futures contracts outstanding as of December 31, 1995, and the
descriptions and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
- --------------------------------------------------------------------------------
<S> <C> <C>
Five-Year US Treasury Note Futures
Mar 1996 - Sells to Open...................... 100 $ (147,677)
Municipal Bond Index Futures
Mar 1996 - Sells to Open...................... 400 (379,926)
US Treasury Bond Futures
Mar 1996 - Buys to Open....................... 400 559,292
----- ------------
900 $ 31,689
===== ============
</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 security's 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 shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for
the year ended December 31, 1995 are payments to VKAC of approximately
$1,016,600.
B-44
<PAGE> 445
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
Van Kampen American Capital Insured Tax Free Income Fund, formerly known as
Van Kampen Merritt Insured Tax Free Income Fund (the "Fund"), is a separate
diversified series of Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "Trust"). The Trust is an open-end management investment
company, commonly known as a mutual fund. The Fund's investment objective is to
provide investors with a high level of current income exempt from federal income
taxes, with liquidity and safety of principal primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the portfolios of the Fund will be insured by AMBAC Indemnity
Corporation or by other municipal bond insurers whose claims-paying ability is
rated "AAA" by Standard & Poor's Ratings Group on the date of purchase. The
Fund's portfolio is managed by Van Kampen American Capital Investment Advisory
Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated 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.
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. This omitted information may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Description of Municipal Securities Ratings............................................. B-15
Trustees and Officers................................................................... B-20
Investment Advisory and Other Services.................................................. B-28
Custodian and Independent Auditors...................................................... B-30
Portfolio Transactions and Brokerage Allocations........................................ B-30
Tax Status of the Fund.................................................................. B-31
The Distributor......................................................................... B-31
Legal Counsel........................................................................... B-32
Performance Information................................................................. B-33
Independent Auditors' Report............................................................ B-35
Financial Statements.................................................................... B-36
Notes to Financial Statements........................................................... B-54
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 446
THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust is an unincorporated
business trust established under the laws of the State of Delaware by an
Agreement and Declaration of Trust dated as of May 10, 1995, (the "Declaration
of Trust"). The Declaration of Trust permits the Trustees to create one or more
separate investment portfolios and issue a series of shares for each portfolio.
The Trustees can further sub-divide each series of shares into one or more
classes of shares for each portfolio. At present, the Fund, Van Kampen American
Capital Tax Free High Income Fund, Van Kampen American Capital California
Insured Tax Free Fund, Van Kampen American Capital Municipal Income Fund, Van
Kampen American Capital 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 commenced investment operations. Other series may be organized and
offered in the future. The Fund was originally organized as a Maryland
corporation under the name Van Kampen Merritt Insured Tax Free Fund Inc., was
subsequently reorganized into a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust, under the name Van Kampen Merritt Insured Tax Free
Income Fund as of February 22, 1988. The Fund was again reorganized as a series
of the Trust and adopted its present name as of July 31, 1995.
Each share in a series of the Trust represents an equal proportionate interest
in the assets of such series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights other than those described in the Prospectus.
The Trust does not contemplate holding regular meetings of shareholders to elect
Trustees or otherwise. However, the holders of 10% or more of the outstanding
shares may by written request require a meeting to consider the removal of
Trustees by a vote of two-thirds of the shares then outstanding cast in person
or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the outstanding shares of each affected
series entitled to vote (or such higher vote as may be required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or other applicable
law).
Statements contained in this Statement of Additional Information to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer.
B-2
<PAGE> 447
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described in the
Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax exempt money market funds that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax exempt money market fund or securities of any tax exempt money
market fund aggregating in value more than 5% of the total assets of the
Fund.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities the Fund may invest in are considered to be interests in real
estate.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were one year or less are excluded from such calculation. The Fund anticipates
that its annual portfolio turnover rate will normally be less than 100%.
B-3
<PAGE> 448
The Fund does not intend to invest in certain "private activity" obligations
issued after August 7, 1986. Interest on such "private activity" obligations is
treated as a preference item for the purpose of calculating the alternative
minimum tax. If the Fund were to invest in such "private activity" obligations,
dividends paid to an investor who is subject to the alternative minimum tax
might not be completely tax exempt or might cause an investor to be subject to
such tax.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included within the term Municipal Securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract. Some
municipal leases and participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes
B-4
<PAGE> 449
plus accrued interest. The interest rate on a floating rate demand note is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand note is adjusted automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
Although the municipal securities in which the Fund may invest will be insured
as to timely payment of both principal and interest, municipal securities, like
other debt obligations, are subject to the risk of non-payment. The ability of
issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income.
INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference
B-5
<PAGE> 450
between the value of the index at the close of the last trading day of the
contract and the price at which the future was originally written. A financial
future is an agreement between two parties to buy and sell a security for a set
price on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash rather
than the underlying securities. An example is the Long-Term Municipal Bond
futures contract traded on the Chicago Board of Trade. It is based on the Bond
Buyer's Municipal Bond Index, which represents an adjusted average price of the
forty most recent long-term municipal issues of $50 million or more ($75 million
in the instance of housing issues) rated A or better by either Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"), maturing
in no less than nineteen years, having a first call in no less than seven nor
more than sixteen years, and callable at par.
The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.
STRATEGIC TRANSACTIONS.
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
B-6
<PAGE> 451
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the
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relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market
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changes, for duration management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The purchase of
a futures contract creates a firm obligation by the Fund, as purchaser, to take
delivery from the seller the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the
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desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed
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option sold by the Fund, or the in-the-money amount plus any sell-back formula
amount in the case of a cash-settled put or call. In addition, when the Fund
sells a call option on an index at a time when the in-the-money amount exceeds
the exercise price, the Fund will segregate, until the option expires or is
closed out, cash or cash equivalents equal in value to such excess. OCC issued
and exchange listed options sold by the Fund other than those above generally
settle with physical delivery, and the Fund will segregate an amount of assets
equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
Illiquid Securities. The Fund may invest up to 15% of its total assets in
illiquid securities, securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable. The sale of restricted and illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments shall become due but shall not be paid
by the issuer, except that in the event of any acceleration of the due
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date of the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the payments insured may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the Shares
of the Fund or the market value of municipal securities, or payments of any
under purchase price upon the tender of the municipal securities. Original Issue
Insurance does not insure against nonpayment of principal of or interest on
municipal securities resulting from the insolvency, negligence or any other act
or omission of the trustee or other paying agent for such obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instruments of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
Portfolio Insurance. The portfolio insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof,
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original
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Issue Insurance or Secondary Market Insurance, the Fund is not required to
additionally insure any such municipal security under any policy of Portfolio
Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because such Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
by Original Issue Insurance or Secondary Market Insurance that are in default or
in significant risk of default.
It is anticipated that certain of the municipal securities to be purchased by
the Fund will be insured under policies obtained by persons other than the Fund.
In instances in which the Fund purchases municipal securities insured under
policies obtained by persons other than the Fund, the Fund does not pay the
premiums for such policies; rather the cost of such policies may be reflected in
a higher purchase price for
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such municipal securities. Accordingly, the yield on such municipal securities
may be lower than that on similar uninsured municipal securities. Premiums for a
Portfolio Insurance Policy generally are paid by the Fund monthly, and are
adjusted for purchases and sales of municipal securities covered by the policy
during the month. The yield on the Fund's portfolio is reduced to the extent of
the insurance premiums paid by the Fund which, in turn, will depend upon the
characteristics of the covered municipal securities held by the Fund. In the
event the Fund were to purchase Secondary Market Insurance with respect to any
municipal securities then covered by a Portfolio Insurance policy, the coverage
and the obligation of the Fund to pay monthly premiums under such policy would
cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
or if the Adviser anticipates such a lowering or otherwise does not believe an
insurer's claims-paying ability merits its existing triple-A rating, the Fund
could seek to obtain additional insurance from an insurer whose claims-paying
ability is rated AAA by S&P or, if the Adviser determines that the cost of
obtaining such additional insurance outweigh the benefits, the Fund may elect
not to obtain additional insurance. In making such determination, the Adviser
will consider the cost of the additional insurance, the new claims-paying
ability rating and financial condition of the existing insurer and the
creditworthiness of the issuer and/or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims-paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor their
obligations under all circumstances. In that regard, it should be noted that the
claims-paying abilities and debt ratings of several large insurers (at least one
of which insured municipal securities) recently have been lowered by one or more
of the nationally recognized securities rating agencies and that many insurers
currently are experiencing adverse results in their investment portfolios. In
addition, certain insurers' operations recently have been assumed by their state
regulatory agencies. The Fund cannot predict the consequences of a state
takeover of an insurer's obligations and, in particular, whether such an insurer
(or its state regulatory agency) could or would honor all of the insurer's
contractual obligations including any outstanding insurance contracts insuring
the timely payment of principal and interest on municipal securities. The Fund
cannot predict the impact which such events might have on the market values of
such municipal security. In the event of a default by an insurer on its
obligations with respect to any municipal securities in the Fund's portfolio,
the Fund would look to the issuer and/or guarantor of the relevant municipal
securities for payments of principal and interest and such issuer and/or
guarantor may not be rated AAA by S&P. Accordingly, the Fund could be exposed to
greater risk of non-payment in such circumstances which could adversely affect
the Fund's net asset value and the market price per Share. Alternatively, the
Fund could elect to dispose of such municipal securities; however, the market
prices for such municipal securities may be lower than the Fund's purchase price
for them and the Fund could sustain a capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Shares.
AMBAC Indemnity Corporation. AMBAC Indemnity is a Wisconsin-domiciled stock
insurance corporation regulated by the Insurance Department of the State of
Wisconsin and licensed to do business in 50 states and the District of Columbia.
On December 31, 1991, AMBAC Indemnity had admitted assets of approximately
$1,431,000,000, total liabilities of approximately $684,400,000 and statutory
capital of approximately $830,000,000. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory contingency reserve. AMBAC
Indemnity was formerly a wholly-owned subsidiary of Citicorp Financial
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Guaranty Holdings, Inc. ("Holdings") (formerly known as AMBAC Inc.), a financial
holding company and itself a wholly-owned subsidiary of Citibank, N.A.
("Citibank"). According to Best Insurance Report (1991 edition), AMBAC
Indemnity's aggregate exposure under all Class I (municipal bond insurance)
financial guaranty bonds, the only class set forth therein, in force as of
December 31, 1990 was $86,200,000,000.
On May 1, 1991, AMBAC Inc. ("AMBAC Inc."), a financial holding company formed
by Holdings, registered for sale with the Securities and Exchange Commission
17,600,000 shares of its common stock. The registration statement with respect
to such sale was declared effective on July 11, 1991. As a result of the sale,
Citibank, through its affiliate Holdings, owns approximately 49% of the total
equity of AMBAC Inc., with a right to cast 20% of the total number of votes of
all shares of outstanding common stock of AMBAC Inc. until such time as
Citibank, including its affiliates, reduces its equity ownership to less than
25% of AMBAC Inc. (at which time the shares owned by it become non-voting). As
of the date of the consummation of the sale of common stock, AMBAC Indemnity
became a direct wholly owned subsidiary of AMBAC Inc. The Wisconsin Insurance
Department has stated that the sale of common stock described herein does not
require its prior approval. Both Moody's and S&P have reaffirmed that the sale
of the common stock of AMBAC Inc. does not affect AMBAC Indemnity's triple-A
claims-paying ability ratings.
AMBAC Indemnity has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC Indemnity has been and will be assumed by a number
of foreign and domestic unaffiliated reinsurers.
Copies of AMBAC Indemnity's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC Indemnity. The address
of AMBAC Indemnity's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
</TABLE>
B-15
<PAGE> 460
<TABLE>
<S> <C>
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
</TABLE>
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<PAGE> 461
<TABLE>
<S> <C>
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgement with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS
TERRITORIES are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS--Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories ("AAA", "AA", "A", "BBB", commonly known as "investment
grade" ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies, and fiduciaries
generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
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<PAGE> 462
<TABLE>
<S> <C>
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest-quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell a security. The
ratings are based on current information furnished to S&P by the issuer or obtained by
S&P from other sources it considers reliable. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of, such information.
</TABLE>
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
</TABLE>
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<PAGE> 463
<TABLE>
<S> <C>
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
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<PAGE> 464
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
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
</TABLE>
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<PAGE> 465
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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.
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.
</TABLE>
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<PAGE> 466
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of 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.
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.
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<PAGE> 467
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-23
<PAGE> 468
<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-24
<PAGE> 469
<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-25
<PAGE> 470
<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-26
<PAGE> 471
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-27
<PAGE> 472
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>
B&C Construction A Corporation........................... 11,883 C 5.03%
4950 Valenty
Chubbuck, ID 83202-1850
R.T. Kelley.............................................. 13,827 C 5.86%
P.O. Box 237
Canadian, TX 79014-0237
Richard K. Bolen......................................... 28,588 C 12.11%
4000 Club House Drive
Champaign, IL 61821-9281
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn is a wholly-owned
B-28
<PAGE> 473
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 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 between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The advisory agreement will continue in effect from year to year if
specifically approved by the Trustees of the Trust, of which the Fund is a
separate series, (or by the Fund's shareholders) and by the disinterested
Trustees in compliance with the requirements of the 1940 Act. The agreement may
be terminated without penalty upon 60 days written notice by either party and
will automatically terminate in the event of assignment.
The investment advisory agreement specifies that the Adviser will reimburse
each of the Funds for annual expenses of such Funds which exceed the most
stringent limit prescribed by any State in which the Fund's shares are offered
for sale. Currently, the most stringent limit in any State would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of any of the Funds.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid advisory
expenses of $5,813,647, $5,028,401 and $4,796,312, respectively.
OTHER AGREEMENTS.
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares with the other Van Kampen American Capital funds advised by the
VK Adviser and distributed by the Distributor in the cost of providing such
services, with 25% of such costs shared proportionately based on the number of
outstanding classes of securities per Fund and with the remaining 75 percent of
such cost being paid by the Fund and such other Van Kampen American Capital
funds based proportionally on their respective net assets.
B-29
<PAGE> 474
For the years ended December 31, 1995, 1994, and 1993, the Fund paid expenses
of approximately $42,800, $31,650 and $19,250, 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 $39,400, $25,100 and $22,700, respectively, representing Van
Kampen American Capital's cost of providing legal services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services is made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital funds distributed by
the Distributor, shared such costs proportionately among themselves based upon
their respective net asset values.
For the years ended December 31, 1995, 1994, and 1993, the Fund paid expenses
of approximately $241,500, $597,765 and $423,425, respectively, representing the
Distributor's cost of providing certain support services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firms' professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the investment
adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser and still must be analyzed and reviewed
by its staff, the receipt of research information is not expected to materially
reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a 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
B-30
<PAGE> 475
services. This will be done, however, only if, in the opinion of the Adviser,
the amount of additional commission or increased cost is reasonable in relation
to the value of such services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commission paid to the Distributor and other affiliates of the
Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
STRATEGIC INSIGHT. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
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
B-31
<PAGE> 476
managed by Clayton, Dubilier & Rice, Inc. Clayton & Dubilier Associates IV
Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein collectively as the Plans. The Plans provide that the
Fund may spend a portion of the Fund's average daily net assets attributable to
each class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor 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 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 $2,809,295, $441,670 and $38,605 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $2,668, $105,808 and $28,044
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares, Class B Shares and Class C Shares, respectively. For the year
ended December 31, 1995, the Fund has reimbursed the Distributor $113,324 and
$3,635 for advertising expenses, and $78,239 and $3,715 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-32
<PAGE> 477
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.
CLASS A SHARES
The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1995 was 11.91%; (ii) the five year period ended December 31, 1995 was 7.37%;
(iii) the ten year period ended December 31, 1995 was 8.38%; and (iv) the period
from December 14, 1984 (the commencement of investment operations of the Fund)
through December 31, 1995 was 9.60%.
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 4.07%. The tax-equivalent yield 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 6.36%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.00%.
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 174.21%.
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 187.84%.
CLASS B SHARES
The average total return, including payment of CDSC, with respect to the Class
B Shares for (i) the one year period ended December 31, 1995 was 12.67% and (ii)
the approximately one year, eight month period from May 1, 1993 (the
commencement of distribution) through December 31, 1995 was 4.13%.
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 3.48%. The tax-equivalent yield 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 5.44%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.51%.
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 11.38%.
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 14.88%.
B-33
<PAGE> 478
CLASS C SHARES
The average total return, including payment of CDSC, with respect to the Class
C Shares for (i) the one year period ended December 31, 1995 was 15.60% and (ii)
the approximately two year, five month period from August 13, 1993 (commencement
of distribution) through December 31, 1995 was 4.57%.
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 3.48%. The tax-equivalent yield 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 5.44%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.51%.
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 11.39%.
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 11.39%.
B-34
<PAGE> 479
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen American Capital Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Insured Tax Free 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 Insured Tax Free 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
January 30, 1996
B-35
<PAGE> 480
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
Alabama 1.8%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA Insd) .................. 6.000% 10/01/14 $2,369,160
2,000 Alabama Wtr Pollutn Ctl Auth Revolving Fund Ln Ser A (AMBAC Insd) ............ 6.750 08/15/17 2,272,100
2,000 Birmingham-Carraway, AL Methodist Hlth Sys Ser A (Connie Lee Insd) ........... 5.875 08/15/25 2,062,780
2,500 Jefferson Cnty, AL Brd Edl Cap Outlay Sch (AMBAC Insd) ....................... 5.875 02/15/20 2,596,375
5,500 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd) .............................. 7.700 12/01/19 6,042,850
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur Genl Hosp Rfdg (Connie
Lee Insd) .................................................................... 6.250 03/01/13 5,899,575
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd) .......................... 6.500 04/01/16 2,640,984
1,600 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FSA Insd) ..................... 6.800 08/15/14 1,817,584
----------
25,701,408
----------
Alaska 1.1%
3,000 Alaska St Hsg Fin Corp Ser A (MBIA Insd) ..................................... 5.875 12/01/24 3,024,150
7,000 Alaska St Hsg Fin Corp Ser A (MBIA Insd) ..................................... 5.875 12/01/30 7,026,390
3,200 Alaska St Hsg Fin Corp Ser A Rfdg (MBIA Insd) ................................ 5.850 06/01/15 3,217,568
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd) ................................. 6.600 12/01/07 2,660,538
----------
15,928,646
----------
Arizona 1.4%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd) <F3> ........................... 6.250 09/01/10 11,965,250
2,720 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Irvington Proj Tucson Ser A
Rfdg (FSA Insd) .............................................................. 7.250 07/15/10 3,092,477
1,100 Santa Cruz Cnty, AZ Unified Sch Dist No 1 (AMBAC Insd) ....................... * 01/01/09 571,120
1,100 Santa Cruz Cnty, AZ Unified Sch Dist No 1 (AMBAC Insd) ....................... * 07/01/09 552,816
1,800 Tucson, AZ Street & Hwy User Rev Sr Lien Ser A (MBIA Insd) ................... 7.000 07/01/11 2,201,706
2,000 Tucson, AZ Street & Hwy User Rev Sr Lien Ser A (MBIA Insd) ................... 7.000 07/01/12 2,465,160
----------
20,848,529
----------
California 20.1%
2,750 Antioch Area, CA Pub Fac Fin Agy (AMBAC Insd) ................................ 5.300 08/01/20 2,721,895
4,290 Antioch Area, CA Pub Fac Fin Agy Cmnty Fac Dist No 1989 (AMBAC Insd).......... 5.300 08/01/15 4,251,090
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev Ser A (Cap Guar
Insd) ........................................................................ 6.000 12/15/14 2,997,105
5,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool Rev Ser A (AMBAC Insd)
.............................................................................. 6.000 12/15/15 5,290,150
2,555 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) ............................. 5.875 08/01/12 2,703,548
1,985 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) ............................. 5.875 08/01/14 2,093,758
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (Inverse Fltg) (MBIA Insd) .... 5.650 06/01/15 5,014,200
1,000 Burbank, CA Wastewtr Treatment Rev Ser A (FGIC Insd) ......................... 5.500 06/01/25 1,002,900
1,025 California Edl Fac Auth Rev College of Osteopathic Rfdg (Connie Lee Insd) .... 5.650 06/01/07 1,080,576
5,000 California Hlth Fac Fin Auth Rev Kaiser Permanente Ser A (FSA Insd) .......... 5.550 08/15/25 5,003,250
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg (AMBAC Insd) ......... 6.700 01/01/13 10,700,900
3,605 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (MBIA Insd) ........... 8.100 03/01/18 3,901,007
11,900 California St (FGIC Insd) .................................................... 6.000 08/01/16 12,622,211
10,875 California St (FGIC Insd) .................................................... 6.000 08/01/19 11,435,715
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA St Prison D
Susanville (MBIA Insd) ....................................................... 5.375 06/01/18 9,999,500
1,645 California St Pub Wks Brd Lease Rev Dept of Justice Bldg Ser A (FSA Insd) .... 5.600 05/01/08 1,714,320
16,250 California St Pub Wks Brd Lease Rev Var Univ CA Projs Ser A (AMBAC Insd) ..... 6.400 12/01/16 17,583,637
600 California St Var Purp (FGIC Insd) ........................................... 6.500 09/01/10 690,834
4,210 California Statewide Cmnty Dev Auth Rev Ctfs Partn Sisters of Charity
Leavenworth (MBIA Insd) ...................................................... 5.375 12/01/12 4,243,638
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd) ................................... 6.200 09/01/18 3,195,570
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 481
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California (Continued)
$ 220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj Ser 3 (MBIA Insd)... 8.000% 07/01/18 $ 243,624
10,280 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj Ser 3 (Prerefunded
@ 07/01/98) (MBIA Insd) .................................................... 8.000 07/01/18 11,466,106
2,595 Contra Costa Cnty, CA Santn Dist No 7A Ctfs Partn Sub-Delta Diablo Fin Corp
(Prerefunded @ 12/01/98) (MBIA Insd) ....................................... 7.600 12/01/08 2,904,765
1,000 Corona Norco, CA Unified Sch Dist Lease Rev Partn Insd Land Acquis Ser A
(FSA Insd) ................................................................. 6.000 04/15/19 1,043,200
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refin (FGIC Insd) ............... 6.300 09/01/12 1,338,237
425 Earlimart, CA Elem Sch Dist Ser 1 (AMBAC Insd) ............................. 6.700 08/01/21 514,956
5,675 Escondido, CA Jt Pwrs Fin Auth Lease Rev CA Cent for the Arts Rfdg (AMBAC
Insd) ...................................................................... * 09/01/17 1,506,769
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd) ................... * 11/15/21 1,218,165
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ............. 6.500 11/01/12 1,100,470
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ............. 6.625 11/01/22 7,693,490
500 Long Beach, CA Redev Agy Downtown Redev Proj Ser A (Prerefunded @ 11/01/98)
(AMBAC Insd) ............................................................... 7.750 11/01/10 560,325
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev Rfdg (AMBAC Insd)... 6.000 12/01/16 3,673,495
3,000 Los Angeles, CA Cmnty Redev Agy Ser H Tax Alloc Bunker Hill Rfdg (FSA Insd). 6.500 12/01/14 3,285,270
1,830 Los Angeles, CA Ser A (FGIC Insd) .......................................... 6.125 09/01/13 1,946,370
6,420 Los Angeles, CA Unified Sch Dist Ctfs Partn Multi Ppty Proj Rfdg (FSA Insd). 5.625 11/01/13 6,420,000
3,500 Madera Cnty, CA Ctfs Partn Vly Children's Hosp (MBIA Insd) ................. 6.125 03/15/23 3,706,465
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg (MBIA Insd)...... 6.700 10/01/21 8,277,675
1,000 Martinez, CA Ctfs Partn Martinez Pub Impt Corp (Prerefunded @ 12/01/98)
(AMBAC Insd) ............................................................... 7.700 12/01/18 1,131,040
1,290 Martinez, CA Unified Sch Dist Guar Ctfs Elig Rfdg (Cap Guar Insd) .......... 6.000 08/01/09 1,356,048
1,315 Mountain View, CA Ctfs Partn (MBIA Insd) ................................... 6.000 10/01/16 1,383,459
2,000 MSR Pub Pwr Agy CA San Juan Proj Rev Ser F Rfdg (AMBAC Insd) ............... 6.000 07/01/20 2,098,160
2,755 New Haven, CA Unified Sch Dist Cap Apprec Ser D (AMBAC Insd) ............... * 08/01/12 1,082,715
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area No 1 Rfdg (MBIA Insd)... 6.250 03/01/19 14,475,324
1,500 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg (Cap Guar Insd) .... 6.000 09/01/19 1,588,050
4,885 Ontario, CA Redev Fin Auth Rev Proj No 1 Cent City Cimarron Proj (AMBAC
Insd) ...................................................................... 6.250 08/01/15 5,181,861
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg (AMBAC Insd) ..... 6.000 06/01/17 2,958,127
6,220 Orange Cnty, CA Recovery Ser A Rfdg (MBIA Insd) ............................ 6.000 06/01/10 6,660,687
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A (MBIA Insd) ...... 6.000 09/01/15 3,056,838
2,450 Paramount, CA Redev Agy Tax Alloc (MBIA Insd) .............................. 6.250 08/01/11 2,630,663
2,600 Paramount, CA Redev Agy Tax Alloc (MBIA Insd) .............................. 6.250 08/01/12 2,783,274
2,765 Paramount, CA Redev Agy Tax Alloc (MBIA Insd) .............................. 6.250 08/01/13 2,963,499
2,935 Paramount, CA Redev Agy Tax Alloc (MBIA Insd) .............................. 6.250 08/01/14 3,145,704
3,120 Paramount, CA Redev Agy Tax Alloc (MBIA Insd) .............................. 6.250 08/01/15 3,339,929
2,180 Petaluma, CA City Jt Union High Sch Dist (Prerefunded @ 08/01/01) (FGIC
Insd) ...................................................................... * 08/01/18 506,152
2,500 Pomona, CA Pub Fin Auth Rev Ser H (Cap Mac Insd) ........................... 5.750 02/01/20 2,556,500
3,200 Rancho, CA Wtr Dist Fin Auth Rev Rfdg (FGIC Insd) .......................... 5.900 11/01/15 3,371,296
1,400 Reedley, CA Pub Fin Auth Lease Rev Wastewtr Treatment Plant Proj (AMBAC
Insd) ...................................................................... 6.050 05/01/15 1,470,392
1,200 Riverside, CA Redev Agy Tax Alloc Casa Blanca Proj Ser A Rfdg (MBIA Insd)... 5.625 08/01/23 1,212,132
4,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA Insd) .............. 5.750 08/15/13 4,109,320
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 482
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California (Continued)
$ 4,680 San Bernardino Cnty, CA Ctfs Partn Med Cent Fin Proj Ser A (MBIA Insd) ....... 5.500% 08/01/15 $ 4,676,958
13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap) (MBIA Insd) ......... 5.500 07/01/16 13,964,358
1,000 San Jose, CA Fin Auth Rev Convention Cent Proj Ser C Rfdg (Cap Guar Insd)..... 6.300 09/01/09 1,079,840
2,500 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement Proj Ser A
(AMBAC Insd) ................................................................. 6.875 11/15/14 2,869,700
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC Insd) ................ 6.200 07/02/09 1,070,790
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd) ................................ 6.200 09/01/09 2,161,480
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA Insd) .................. 5.750 08/01/14 2,574,909
7,050 South Tahoe, CA Jt Pwrs Fin Auth Rev Lease Redev No 1 Ser A Rfdg (Cap Mac Insd) 5.500 10/01/18 7,070,515
12,600 Southern CA Pub Pwr Auth (FSA Insd) .......................................... 6.000 07/01/12 13,083,336
1,000 Temecula Vly, CA Unified Sch Dist Ser B Rfdg (FGIC Insd) ..................... 6.000 09/01/12 1,053,410
2,460 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd) ..................... 6.750 01/01/12 2,568,191
1,500 University of CA Rev Ser A (Connie Lee Insd) ................................. 5.700 09/01/14 1,508,655
3,845 Vista, CA Unified Sch Dist Ctfs Partn Ser A Rfdg (FSA Insd) .................. * 11/01/17 1,067,487
2,000 William S Hart CA Jt Sch Fin Auth Spl Tax Rev Cmnty Fac Rfdg (Cap Guar Insd).. 6.500 09/01/14 2,222,260
-----------
291,178,245
-----------
Colorado 4.2%
12,750 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A (FSA Insd) ............... 7.250 02/15/16 14,706,870
2,090 Colorado Hlth Fac Auth Rev Sisters of Charity Hlth Care Ser A (MBIA Insd).... 6.000 05/15/13 2,157,047
1,000 Colorado Wtr Res & Pwr Dev Auth Small Wtr Res Rev Ser A (Prerefunded @
11/01/00) (FGIC Insd) ....................................................... 7.400 11/01/10 1,141,080
9,840 El Paso Cnty, CO Sch Dist No 49 Falcon (MBIA Insd) <F2> ..................... 6.500 12/01/15 11,070,197
2,000 Highlands Ranch, CO Metro Dist 2 Rfdg (AMBAC Insd) <F2> ..................... 5.000 06/15/16 1,849,820
10 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA Insd) ............. 8.875 10/01/13 10,968
4,500 Mesa Cnty, CO (AMBAC Insd) .................................................. 5.000 10/15/08 4,489,155
1,500 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(AMBAC Insd) ................................................................ 6.125 01/01/07 1,503,075
1,000 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(Prerefunded @ 02/01/96) (AMBAC Insd) ....................................... 6.125 01/01/07 1,000,160
2,050 Thornton, CO Rfdg (FGIC Insd) ............................................... * 12/01/11 889,946
1,550 Thornton, CO Rfdg (FGIC Insd) ............................................... * 12/01/15 538,067
9,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ...................... 6.250 11/15/12 9,718,020
8,600 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ...................... 6.400 11/15/22 9,261,254
2,000 Westminster, CO Wtr & Wastewtr Util Enterprise Rev (AMBAC Insd) ............. 6.250 12/01/14 2,160,900
-----------
60,496,559
-----------
District of Columbia 0.0%
250 District of Columbia Ser B Rfdg (MBIA Insd) ................................. * 06/01/04 163,985
----------
Florida 6.0%
4,125 Dade Cnty, FL Aviation Rev Miami Intl Arpt Ser C (MBIA Insd) ................ 5.750 10/01/25 4,258,114
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ............................ 8.000 10/01/03 1,247,754
690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ............................ 8.000 10/01/04 863,956
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ............................ 8.000 10/01/05 1,490,045
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ............................ 8.000 10/01/06 1,622,552
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ............................ 8.000 10/01/07 1,767,067
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd) ................................ 12.000 10/01/04 3,200,678
13,000 Dade Cnty, FL Wtr & Swr Sys Rev (FGIC Insd) ................................. 5.750 10/01/22 13,419,510
285 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C (FGIC Insd) ......... 7.650 09/01/10 305,811
1,090 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C (FGIC Insd) ......... 7.700 09/01/24 1,167,325
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 483
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Florida (Continued)
$ 20,550 Florida St Brd Edl Cap Outlay Pub Edl Ser C (MBIA Insd) .................... 5.600% 06/01/20 $ 20,832,357
1,410 Florida St Dept Corrections Ctfs Partn Okeechobee Correctional (AMBAC Insd). 6.250 03/01/15 1,538,197
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd) .......................... * 10/01/13 390,280
2,000 Lakeland, FL Elec & Wtr Rev Jr Sub Lien Rfdg (FGIC Insd) <F2> .............. 6.500 10/01/09 2,238,000
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA Insd) .............. 9.114 04/01/20 4,585,000
850 Manatee Cnty, FL Indl Dev Rev Manatee Hosp & Hlth Sys Rfdg (MBIA Insd) ..... 8.250 08/15/14 926,364
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA Insd) ............... 8.553 10/29/21 6,757,500
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd) .................. 6.375 08/01/15 2,192,080
1,090 Sarasota Cnty, FL Util Sys Rev (FGIC Insd) ................................. 6.500 10/01/14 1,216,767
2,000 South Miami, FL Hlth Fac Baptist Hlth Sys Oblig Group Rfdg (MBIA Insd) ..... 5.375 10/01/11 2,031,200
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A Rfdg (MBIA
Insd) ...................................................................... 6.625 12/01/13 11,313,500
2,000 Volusia Cnty, FL Sch Brd Ctfs Partn FL Master Lease Pgm Rfdg (FSA Insd) .... 5.300 08/01/10 2,021,720
1,300 Volusia Cnty, FL Sch Brd Ctfs Partn FL Master Lease Pgm Rfdg (FSA Insd) .... 5.375 08/01/11 1,318,811
-----------
86,704,588
-----------
Georgia 4.1%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ......... 6.250 12/01/08 1,388,888
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ......... 6.250 12/01/17 1,870,103
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (MBIA Insd) ...................... * 01/01/07 3,836,690
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (MBIA Insd) ...................... * 01/01/08 2,637,770
8,430 Metropolitan Atlanta Rapid Tran Auth GA Sales Tax Rev Bonds Ser J
(Prerefunded @ 07/01/98) (FGIC Insd) ....................................... 8.000 07/01/18 9,389,755
10,000 Monroe Cnty, GA Dev Auth Pollutn Ctl Rev GA Pwr Co Scherer 3rd Ser (AMBAC
Insd) ...................................................................... 6.000 07/01/25 10,306,100
15,550 Municipal Elec Auth GA Spl Oblig 5th Crossover Ser Proj One (AMBAC Insd) ... 6.400 01/01/13 17,763,231
10,000 Municipal Elec Auth GA Spl Oblig 5th Crossover Ser Proj One (MBIA Insd) .... 6.500 01/01/17 11,670,800
------------
58,863,337
------------
Hawaii 1.0%
12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd) ........................... 6.400 07/01/08 14,426,466
-----------
Illinois 10.4%
1,000 Berwyn, IL (MBIA Insd) ..................................................... 7.000 11/15/10 1,122,320
875 Chicago, IL Pub Bldg Comm Bldg Rev Cmnty College Dist No 508-B (BIGI Insd).. 8.750 01/01/07 963,567
9,000 Chicago, IL (AMBAC Insd) <F2> .............................................. 5.500 01/01/18 9,016,740
2,720 Chicago, IL Pub Bldg Comm Bldg Rev Chicago Transit Auth (AMBAC Insd) ....... 6.600 01/01/15 3,005,981
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) ....................... * 01/01/06 2,148,587
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) ....................... * 01/01/07 1,801,552
1,000 Chicago, IL Wastewtr Transmission Rev (Prerefunded @ 01/01/03) (FGIC Insd).. 6.300 01/01/12 1,126,280
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.400 01/01/01 1,178,790
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.750 01/01/03 6,923,625
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.750 01/01/04 10,737,094
2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.750 01/01/05 3,167,914
3,500 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn (FGIC Insd) ..... 8.750 01/01/07 4,630,500
3,000 Cook Cnty, IL Cmnty Cons Sch Dist No 054 Schaumburg Twp Ser B (FGIC Insd)... * 01/01/10 1,323,180
10,000 Cook Cnty, IL Cmnty Cons Sch Dist No 054 Schaumburg Twp Ser B (FGIC Insd)... * 01/01/11 4,089,400
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 484
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Illinois (Continued)
$ 1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor (AMBAC Insd) ..... *% 12/01/05 $ 789,709
8,280 Cook Cnty, IL Cnty Juvenile Detention Ser A (AMBAC Insd) ...................... * 11/01/08 4,353,707
750 Decatur, IL Hlth Care Fac Rev Cmnty Svcs Corp (BIGI Insd) ..................... 8.100 11/15/18 792,682
2,500 Des Plaines, IL Hosp Fac Rev Holy Family Hosp Rfdg (AMBAC Insd) ............... 9.250 01/01/14 2,561,050
1,705 Evanston, IL Residential Mtg Rev (AMBAC Insd) ................................. 6.375 01/01/09 1,823,174
10,000 Illinois Dev Fin Auth Pollutn Ctl Rev Comwlth Edison Co Proj Ser D Rfdg (AMBAC
Insd) ......................................................................... 6.750 03/01/15 11,421,100
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A 1st Mtg Rfdg (MBIA
Insd) ......................................................................... 7.400 12/01/24 41,365,800
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 (FSA Insd) ............ 6.650 02/01/11 2,317,680
5,025 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205 Rfdg (FSA Insd) ....... 6.650 02/01/12 5,662,270
1,294 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B (MBIA Insd) ............ 7.900 08/15/03 1,324,512
35 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B (Prerefunded @
08/15/96) (MBIA Insd) ......................................................... 7.900 08/15/03 36,637
213 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg (MBIA Insd)........ 7.900 08/15/03 253,244
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg) (MBIA Insd) ....... 9.187 06/19/15 5,925,000
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse Fltg) (MBIA Insd) ..... 9.365 05/18/21 5,950,000
3,400 Illinois Hlth Fac Auth Rev Rush Presbyterian Saint Luke Hosp (Inverse Fltg)
(MBIA Insd) ................................................................... 9.260 10/01/24 4,046,000
1,695 Illinois Hlth Fac Auth Rev SSM Hlth Care Proj Ser B (Prerefunded @ 06/01/98)
(MBIA Insd) ................................................................... 8.000 06/01/14 1,882,840
6,110 Rosemont, IL Tax Increment 3 (FGIC Insd) ...................................... * 12/01/06 3,541,906
3,000 Rosemont, IL Tax Increment 3 (FGIC Insd) ...................................... * 12/01/07 1,638,120
1,285 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd) ................................... 8.000 12/01/05 1,597,872
1,185 Saint Clair Cnty, IL Ctfs Partn Indl Dev Rev (MBIA Insd) ...................... 8.000 12/01/04 1,459,944
-----------
149,978,777
-----------
- -
Indiana 2.0%
2,000 Indiana Bond Bank Spl Pgm Ser A (AMBAC Insd) .................................. 9.750 08/01/09 2,742,960
3,840 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps of IN (MBIA Insd) .............. 7.000 07/01/21 4,292,736
3,555 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj (AMBAC Insd) <F2> ......... 5.600 05/15/14 3,559,479
8,500 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj (AMBAC Insd) <F2> ......... 5.700 05/15/22 8,593,500
1,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj (MBIA Insd) ............... 6.850 07/01/22 1,100,620
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosps Proj Rfdg & Impt (MBIA Insd) ... 6.400 05/01/12 5,368,400
1,000 Marion Cnty, IN Convention & Recreational Fac Auth Excise Tax Rev Lease Rental
Ser A (AMBAC Insd) ............................................................ 7.000 06/01/21 1,124,720
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South Bend Proj (MBIA
Insd) ......................................................................... 6.250 08/15/12 1,066,850
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp South Bend Ser A Rfdg
(MBIA Insd) ................................................................... 7.000 08/15/20 1,120,240
-----------
28,969,505
-----------
Kansas 3.3%
38,750 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) <F3> .............................................................. 7.000 06/01/31 43,942,112
2,015 Harvey Cnty, KS Unified Sch Dist (AMBAC Insd) <F2> ............................ 5.000 09/01/16 1,972,907
1,700 Kansas St Dev Fin Brd (AMBAC Insd) ............................................ 5.500 12/01/15 1,705,083
-----------
47,620,102
-----------
Kentucky 0.0%
80 Kentucky Cntys Single Family Mtg Presbyterian Homes Ser A Rfdg
(MBIA Insd) ................................................................... 8.625 09/01/15 85,474
-----------
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 485
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Louisiana 1.2%
$ 4,065 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles Mem Hosp
Proj Ser A (Connie Lee Insd) ................................................... 6.375% 12/01/12 $ 4,505,605
5,530 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles Mem Hosp
Proj Ser A (Connie Lee Insd) ................................................... 6.500 12/01/18 6,392,182
310 Louisiana Pub Fac Auth Rev Med Cent LA at New Orleans Proj (Connie Lee
Insd) .......................................................................... 6.250 10/15/10 327,949
4,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac Our Lady Med Cent Ser C
(MBIA Insd) .................................................................... 8.200 12/01/15 4,675,349
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985 Ser A (MBIA Insd)...... * 09/15/16 1,094,900
-----------
16,995,985
-----------
Maine 0.3%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC Insd) ................. 9.200 08/01/99 2,756,380
1,750 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) .......................... 7.100 07/01/14 2,013,883
----------
4,770,263
----------
Maryland 0.0%
195 Baltimore, MD Ctfs Partn Ser C Rfdg (MBIA Insd) ................................ 7.200 04/01/10 218,757
55 Baltimore, MD Ctfs Partn Ser C Rfdg (Prerefunded @ 04/01/00) (MBIA Insd)........ 7.200 04/01/10 62,401
40 Maryland St Hlth & High Edl Fac Auth Rev North Arundel Hosp Issue
(Prerefunded @ 07/01/98) (MBIA Insd) ........................................... 7.875 07/01/21 44,436
----------
325,594
----------
Massachusetts 1.3%
4,975 Massachusetts St Hlth & Edl Fac Auth Rev Emerson Hosp Issue Ser D Rfdg
(FSA Insd) ..................................................................... 5.700 08/15/12 5,121,812
4,000 Massachusetts St Hlth & Edl Fac Auth Rev Emerson Hosp Issue Ser D Rfdg
(AMBAC Insd) ................................................................... 5.800 08/15/18 4,100,600
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser B1 (MBIA Insd ...... 6.250 08/15/14 1,823,386
4,000 Massachusetts St Hlth & Edl Fac Auth Rev Newton-Wellesley Hosp Issue Ser C
(MBIA Insd) .................................................................... 8.000 07/01/18 4,455,400
2,000 Massachusetts St Hlth & Edl Fac Auth Rev Newton-Wellesley Hosp Issue Ser
E (MBIA Insd) .................................................................. 5.875 07/01/15 2,107,820
1,000 Massachusetts St Hlth & Edl Fac Auth Rev Univ Hosp Ser C (MBIA Insd) ........... 7.250 07/01/19 1,121,500
-----------
18,730,518
-----------
Michigan 3.2%
2,325 Bay City, MI (AMBAC Insd) ...................................................... * 06/01/15 824,910
1,000 Bay City, MI (AMBAC Insd) ...................................................... * 06/01/16 333,030
3,605 Detroit, MI Sewage Disp Rev Ser B Rfdg (MBIA Insd) ............................. 5.250 07/01/21 3,557,594
3,000 Detroit, MI Sewage Disp Rev Wtr Supply Sys Ser A (MBIA Insd) ................... 5.000 07/01/25 2,890,260
1,450 Detroit, MI Wtr Supply Sys Rev 2nd Lein Ser A (MBIA Insd) ...................... 5.200 07/01/08 1,489,629
500 Kalkaska, MI Pub Schs (AMBAC Insd) ............................................. * 05/01/15 178,355
14,750 Livonia, MI Pub Sch Dist Ser II (FGIC Insd) .................................... * 05/01/14 5,238,905
21,000 Livonia, MI Pub Sch Dist Ser II (FGIC Insd) .................................... * 05/01/21 4,539,990
17,125 Michigan Pub Pwr Agy Rev Belle River Proj Ser A Rfdg (MBIA Insd) ............... 5.250 01/01/18 16,937,824
2,500 Michigan St Hosp Fin Auth Rev Hosp Port Huron Hosp Oblig Rfdg (FSA Insd) ....... 5.375 07/01/12 2,513,850
1,535 Michigan St Hosp Fin Auth Rev Hosp Port Huron Hosp Oblig Rfdg (FSA Insd) ....... 5.500 07/01/15 1,530,441
2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Embedded Swap) (AMBAC Insd) ..... 4.850 04/01/04 1,930,100
1,100 Milan, MI Area Schs (AMBAC Insd) ............................................... 5.000 05/01/10 1,086,085
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec (Prerefunded @ 05/01/07)
(MBIA Insd) .................................................................... * 05/01/17 1,425,700
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 486
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michigan (Continued)
$ 1,000 Paw Paw, MI Pub Sch Dist Bldg & Site (FGIC Insd) .............................. 5.600% 05/15/15 $ 1,010,420
1,000 Paw Paw, MI Pub Sch Dist Bldg & Site (FGIC Insd) .............................. 5.625 05/01/25 1,010,040
-----------
46,497,133
-----------
Minnesota 1.4%
1,000 Brainerd, MN Rev Evangelical Lutheran Ser B Rfdg (Cap Guar Insd) .............. 6.650 03/01/17 1,106,710
5,600 Minneapolis-St Paul, MN Hsg & Redev Auth Hlth Care Sys Rev Health One
Ser A (MBIA Insd) ............................................................. 7.400 08/15/11 6,325,984
3,215 Minnesota St Hsg Fin Agy Rental Hsg Ser D (MBIA Insd) ......................... 5.800 08/01/11 3,278,046
3,000 Minnesota St Hsg Fin Agy Rental Hsg Ser D (MBIA Insd) ......................... 5.900 08/01/15 3,063,480
1,500 Minnesota St Hsg Fin Agy Rental Hsg Ser D (MBIA Insd) ......................... 6.000 02/01/22 1,526,655
5,000 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser B (FGIC Insd) ................. 5.000 01/01/13 4,940,800
-----------
20,241,675
-----------
Mississippi 0.2%
1,000 Alcorn Cnty Corinth, MS Hosp Rev Magnolia Regl Hlth Cent Rfdg
(AMBAC Insd) .................................................................. 5.750 10/01/13 1,042,910
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment Fac Ser A
Rfdg (FGIC Insd) .............................................................. 8.500 02/01/13 1,379,710
-----------
2,422,620
-----------
Missouri 2.5%
2,700 Central MO St Univ Rev Hsg Sys (Prerefunded @ 07/01/01) (MBIA Insd) ........... 7.000 07/01/14 3,105,351
4,760 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd) ............................. * 12/01/16 611,565
420 Jackson Cnty, MO Pub Fac Auth Insd Leasehold Rev Cap Impt Proj Rfdg &
Impt (MBIA Insd) .............................................................. 6.125 12/01/15 446,048
1,090 Jackson Cnty, MO Single Family Mtg Rev Tax Exempt Multiplier Bond (MBIA
Insd) ......................................................................... * 12/01/16 140,043
2,250 Kansas City, MO Muni Assistance Corp Rev Leasehold H Roe Bartle Ser B1
Rfdg (AMBAC Insd) ............................................................. 7.125 04/15/16 2,548,350
2,150 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A Rfdg &
Impt (Prerefunded @ 02/15/01) (FGIC Insd) ..................................... 6.800 02/15/06 2,435,821
2,350 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A Rfdg &
Impt (Prerefunded @ 02/15/01) (FGIC Insd) ..................................... 6.875 02/15/21 2,670,446
5,650 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlth Care Proj Rfdg
(MBIA Insd) ................................................................... 6.250 06/01/16 6,008,606
9,250 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlth Care Proj Rfdg
(Prerefunded @ 06/01/98) (MBIA Insd) .......................................... 7.750 06/01/16 10,222,267
1,000 Missouri St Hlth & Edl Fac Auth Rev Saint Luke's Hosp KC Proj Rfdg &
Impt (Prerefunded @ 11/15/01) (MBIA Insd) ..................................... 7.000 11/15/13 1,157,830
670 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd) ....................... 9.250 10/01/16 723,754
1,550 Saint Louis, MO Muni Fin Corp Leasehold Rev Rfdg & Impt (FGIC Insd) ........... 6.250 02/15/12 1,678,402
2,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd) ........................................ 6.200 06/01/10 2,249,940
1,000 Springfield, MO Sch Dist No R12 Ser B Rfdg (FGIC Insd) ........................ 9.500 03/01/07 1,394,790
-----------
35,393,213
-----------
Nebraska 0.2%
1,250 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd) .................................................................. 6.900 09/01/11 1,412,988
1,500 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg (AMBAC Insd).... 7.000 09/01/21 1,691,745
-----------
3,104,733
-----------
Nevada 0.9%
2,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj C Rfdg (AMBAC Insd) ................ 7.200 10/01/22 2,289,860
3,225 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser B (Prerefunded @ 01/01/00)
(MBIA Insd) ................................................................... 7.750 07/01/15 3,684,788
4,865 Reno, NV Hosp Rev Dates Saint Mary's Hosp Inc Ser C (Prerefunded @ 01/01/00)
(MBIA Insd) ................................................................... 7.750 07/01/15 5,587,745
3,720 Washoe Cnty, NV Rfdg & Impt (MBIA Insd) ....................................... * 07/01/07 2,086,362
----------
13,648,755
----------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 487
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Hampshire 0.2%
$ 2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC Insd) .................. 9.364% 11/01/17 $ 3,221,875
----------
New Jersey 3.3%
1,950 Camden Cnty, NJ Muni Util Auth Swr Rev (FGIC Insd) ............................ 8.250 12/01/17 2,135,426
5,500 Howell Twp, NJ Rfdg (FGIC Insd) ............................................... 6.800 01/01/14 6,161,485
3,625 Morristown, NJ Rfdg (FSA Insd) ................................................ 6.400 08/01/14 4,019,037
3,940 New Jersey St Hsg & Mtg Fin Agy Rev Home Mtg Ser B (MBIA Insd) ................ 8.100 10/01/17 4,209,220
22,500 New Jersey St Tran Trust Fund Auth Tran Sys Ser A Rfdg (MBIA Insd) ............ 5.500 06/15/11 23,145,300
3,250 Pleasantville, NJ Sch Dist Ctfs Partn Rfdg (MBIA Insd) ........................ 5.500 10/01/13 3,344,770
2,000 Port Auth NY & NJ Cons 102nd Ser (MBIA Insd) .................................. 5.625 10/15/17 2,020,540
2,250 Sussex Cnty, NJ Muni Util Auth Solid Waste Rev Ser A (Prerefunded @
12/01/98) (MBIA Insd) ......................................................... 7.875 12/01/13 2,531,520
----------
47,567,298
----------
New Mexico 0.1%
100 Farmington, NM Util Sys Rev (Prerefunded @ 05/15/96) (FGIC Insd) .............. 9.750 05/15/13 104,286
1,300 Santa Fe, NM Util Rev Ser A Rfdg (AMBAC Insd) ................................. 5.250 06/01/17 1,287,572
----------
1,391,858
----------
New York 5.4%
4,350 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis Cent Proj (FSA Insd). 6.375 11/15/14 4,746,720
3,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B (MBIA Insd) ........... 5.500 06/15/25 3,007,590
1,000 New York City Ser A (Prerefunded @ 11/01/97) (AMBAC Insd) ..................... 8.500 11/01/12 1,098,330
2,000 New York City Ser B (MBIA Insd) ............................................... 6.950 08/15/12 2,293,360
50 New York City Ser C Subser C1 (MBIA Insd) ..................................... 6.250 08/01/09 54,261
1,500 New York City Ser E Rfdg (MBIA Insd) .......................................... 6.200 08/01/08 1,673,280
5,000 New York St Dorm Auth Rev City Univ Sys 3rd Resolution (AMBAC Insd) ........... 6.250 07/01/18 5,401,900
2,365 New York St Dorm Auth Rev City Univ Sys 3rd Resolution Ser 1 (AMBAC Insd)
............................................................................... 6.250 07/01/16 2,563,069
3,950 New York St Dorm Auth Rev City Univ Sys Ser C (FGIC Insd) ..................... 7.000 07/01/14 4,409,029
1,500 New York St Dorm Auth Rev March of Dimes Fndtn (Prerefunded @ 07/01/97)
(AMBAC Insd) .................................................................. 9.200 07/01/12 1,647,660
675 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs Ser A (MBIA Insd).... 7.750 08/15/10 769,223
1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Ser E (Cap Guar Insd).... 6.500 08/15/15 1,104,060
5,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Ser F Rfdg (MBIA Insd)... 5.250 02/15/19 4,872,300
28,535 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A (AMBAC Insd)............ 6.750 08/15/14 32,599,811
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
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A (MBIA Insd)......... 6.625 03/15/06 3,739,456
1,500 New York St Twy Auth Hwy & Brdg Trust Fund Ser B (FGIC Insd) .................. 6.000 04/01/14 1,582,710
3,500 New York St Urban Dev Corp Rev Correctional Fac Rfdg (AMBAC Insd) ............. 5.250 01/01/18 3,461,745
----------
77,993,784
----------
North Carolina 1.0%
7,200 Charlotte, NC Ctfs Partn Convention Fac Proj Ser C Rfdg (AMBAC Insd) .......... 5.250 12/01/20 7,086,600
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd) ..................... 6.625 06/01/14 1,398,700
500 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev Ser A (AMBAC Insd) .............. 12.900 01/01/97 545,465
5,000 North Carolina Muni Pwr Agy No 1 Catawba Elec Rev Ser A Rfdg (AMBAC Insd)...... 5.375 01/01/20 4,973,300
----------
14,004,065
----------
North Dakota 0.4%
5,000 Mercer Cnty, ND Pollutn Ctl Rev Antelope Vly Station Rfdg (AMBAC Insd) ........ 7.200 06/30/13 6,229,450
----------
</TABLE>
B-43
See Notes to Financial Statements
<PAGE> 488
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ohio 2.3%
$ 3,600 Akron Bath Copley, OH St Twp Hosp Dist Rev Akron Genl Med Cent Proj
(AMBAC Insd) .................................................................. 6.500% 01/01/19 $ 3,906,252
1,000 Akron Bath Copley, OH St Twp Hosp Dist Rev Children's Hosp Med Cent
Akron (Prerefunded @ 11/15/00) (AMBAC Insd) ................................... 7.450 11/15/20 1,160,670
5,000 Clermont Cnty, OH Hosp Fac Rev Muni (Inverse Fltg) (AMBAC Insd) ............... 9.091 10/05/21 5,950,000
2,010 Cleveland, OH (MBIA Insd) ..................................................... 6.500 11/15/09 2,327,700
2,285 Cleveland, OH (MBIA Insd) ..................................................... 6.500 11/15/10 2,635,245
1,000 Cuyahoga Cnty, OH Hosp Rev Richmond Heights Genl Hosp Rfdg (AMBAC
Insd) ......................................................................... 10.000 12/01/11 944,320
8,625 Hamilton, OH Elec Sys Mtg Rev Mtg City of Hamilton Ser B
(Prerefunded @ 10/15/98) (FGIC Insd) .......................................... 8.000 10/15/22 9,694,500
1,000 Montgomery Cnty, OH Solid Waste Rfdg (AMBAC Insd) ............................. 5.350 11/01/10 1,023,280
1,000 Ohio Muni Elec Generation Agy Ser 1993 (AMBAC Insd) ........................... 5.375 02/15/13 1,013,250
1,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl Cleveland Co Proj Rfdg (FGIC Insd) 8.000 12/01/13 1,821,390
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison Ser A Rfdg (FGIC Insd).. 7.450 03/01/16 2,827,700
-----------
33,304,307
-----------
Oklahoma 0.8%
1,385 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd) ......................... 5.250 12/01/16 1,371,925
655 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd) ......................... 5.250 12/01/19 644,887
1,760 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (FSA Insd) ......................... 5.250 12/01/20 1,732,280
1,865 McAlester, OK Pub Wks Auth Rev Rfdg & Impt (AMBAC Insd) ....................... 5.250 12/01/21 1,842,788
1,000 Norman, OK Regl Hosp Auth Hosp Rev (MBIA Insd) ................................ 6.900 09/01/21 1,111,790
4,240 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA Insd) .................. 7.200 03/01/11 4,557,491
500 Tulsa, OK Arpts Impt Trust Genl Rev (MBIA Insd) ............................... 7.500 06/01/08 535,210
-----------
11,796,371
-----------
Oregon 0.8%
1,000 Ontario, OR Catholic Hlth Corp Hosp Fac Auth Hlth Fac Rev
Holy Rosary Med Ser C Rfdg (MBIA Insd) ........................................ 5.500 11/15/12 1,023,150
2,000 Oregon Hlth Sciences Univ Rev Ser A (MBIA Insd) (F2) ...............,.......... 5.250 07/01/25 1,974,860
7,000 Oregon Hlth Sciences Univ Rev Ser B (MBIA Insd) (F2) .......................... 5.250 07/01/15 6,945,120
1,000 Wasco Cnty, OR Vets Home (FSA Insd) ........................................... 6.200 06/01/13 1,081,830
-----------
11,024,960
-----------
Pennsylvania 2.6%
1,000 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Ohio Edison Co
Mansfield Rfdg (FGIC Insd) .................................................... 7.100 06/01/18 1,108,310
500 Beaver Cnty, PA Indl Dev Auth Pollutn Ctl Rev Ohio Edison Proj Ser A
Rfdg (FGIC Insd) .............................................................. 7.750 09/01/24 560,260
2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp Proj
Ser B (FGIC Insd) ............................................................. 6.125 07/01/10 2,139,480
5,250 Delaware River Port Auth PA (AMBAC Insd) ...................................... 5.500 01/01/26 5,293,628
1,000 Emmaus, PA Genl Auth Rev Var Loc Govt Bond Pool Pgm Ser B Var Rate
Cpn (BIGI Insd) ............................................................... 8.000 05/15/18 1,098,770
2,050 Harrisburg, PA Redev Auth Rev Cap Impt Ser A (FGIC Insd) ...................... 7.875 11/02/16 2,232,266
1,000 Lehigh Cnty, PA Indl Dev Auth Pollutn Ctl Rev PA Pwr & Lt Co Proj
Ser A Rfdg (MBIA Insd) ........................................................ 6.400 11/01/21 1,075,420
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg (MBIA
Insd) ......................................................................... 6.700 12/01/21 4,140,300
1,300 New Kensington Arnold, PA (AMBAC Insd) (F2) ................................... 5.375 05/15/20 1,294,670
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne Cnty Cmnty
College (AMBAC Insd) .......................................................... 6.625 08/15/15 1,122,920
6,875 Pennsylvania St Ctfs Partn Ser A Rfdg (AMBAC Insd) ............................ 5.250 07/01/11 6,897,962
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd) ....................... 6.375 07/01/14 2,443,905
2,250 Philadelphia, PA Sch Dist Ser B (AMBAC Insd) .................................. 5.500 09/01/15 2,258,460
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 489
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pennsylvania (Continued)
$ 1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth Saint Mary
Ser A (MBIA Insd) ............................................................ 6.500% 07/01/22 $ 1,085,590
1,000 Saint Mary's Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth Sys Ser B
(MBIA Insd) .................................................................. 6.500 07/01/12 1,094,890
1,000 Sayre, PA Hlth Care Fac Auth Rev VHA Cap Asset Fin Pgm Ser H2 (AMBAC Insd).... 7.625 12/01/15 1,140,460
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist Ser D (MBIA Insd).... 6.500 02/01/14 1,105,740
1,655 West Mifflin, PA Area Sch Dist (FGIC Insd) ................................... 5.500 02/15/11 1,694,008
-----------
37,787,039
-----------
Rhode Island 1.7%
500 Rhode Island Depositors Econ Protection Corp Spl Oblig Ser A
(Prerefunded @ 08/01/02) (FSA Insd) .......................................... 6.625 08/01/19 572,375
2,000 Rhode Island St Hlth & Edl Bldg Corp Rev Higher Edl Fac Roger Williams
(Connie Lee Insd) ............................................................ 7.250 11/15/24 2,302,180
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp (Inverse Fltg) (FGIC
Insd) (F3) ................................................................... 9.911 08/15/21 21,285,000
-----------
24,159,555
-----------
South Carolina 1.2%
1,000 Charleston Cnty, SC Ctfs Partn Charleston Pub Fac Corp (Prerefunded @
06/01/01) (MBIA Insd) ........................................................ 7.100 06/01/11 1,153,130
1,500 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) ............................. 6.875 06/01/14 1,716,135
3,000 Florence Cnty, SC Pub Fac Corp Ctfs Partn Law Enforcement Proj Civic
Cent (Prerefunded @ 03/01/00) (AMBAC Insd) ................................... 7.600 03/01/14 3,417,810
1,000 Greenville, SC Hosp Sys Hosp Fac Rev Ser A (Prerefunded @ 05/01/98)
(FGIC Insd) .................................................................. 7.800 05/01/15 1,103,380
1,000 Marion Cnty, SC Hosp Dist (AMBAC Insd) ....................................... 5.500 11/01/10 1,000,780
2,000 Marion Cnty, SC Hosp Dist (AMBAC Insd) ....................................... 5.375 11/01/25 1,914,020
400 Rock Hill, SC Util Sys Rev (Prerefunded @ 01/01/98) (FGIC Insd) .............. 8.000 01/01/18 438,664
635 Saint Andrews, SC Pub Svcs Dist Swr Sys Rev (FGIC Insd) ...................... 7.750 01/01/18 690,061
5,750 South Carolina Jobs Econ Dev Auth Hosp Fac Rev Tuomey Regl Med Cent
Ser A (MBIA Insd) (F2) ....................................................... 5.750 11/01/15 5,896,050
-----------
17,330,030
-----------
South Dakota 0.8%
5,205 South Dakota St Lease Rev Trust Ctfs Ser A (Cap Guar Insd) ................... 6.625 09/01/12 6,066,271
4,000 South Dakota St Lease Rev Trust Ctfs Ser A (Cap Guar Insd) ................... 6.700 09/01/17 4,771,240
-----------
10,837,511
-----------
Tennessee 0.4%
2,000 Chattanooga-Hamilton Cnty, TN Hosp Auth Hosp Rev Erlanger
Med Cent Ser B (Inverse Fltg) (Prerefunded @ 05/01/01) (FSA Insd) ............ 9.774 05/25/21 2,542,500
3,320 Johnson City, TN Sch Sales Tax (AMBAC Insd) .................................. 6.700 05/01/18 3,746,720
-----------
6,289,220
-----------
Texas 6.6%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) ................................................... 8.683 01/01/22 3,442,500
1,000 Austin, TX Util Sys Rev (Prerefunded @ 05/15/02) (BIGI Insd) ................ 8.625 11/15/12 1,236,420
12,500 Austin, TX Util Sys Rev Ser A Rfdg (MBIA Insd) .............................. * 11/15/10 5,698,625
2,300 Brazoria Cnty, TX Hlth Fac Dev Corp Hosp Rev Brazosport Mem Hosp Rfdg
(FSA Insd) .................................................................. 5.500 07/01/13 2,339,146
6,500 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co (MBIA Insd) ............... 5.800 08/01/15 6,618,755
9,000 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj B Rfdg (MBIA Insd).... 8.250 05/01/15 9,973,980
6,515 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj C Rfdg (MBIA Insd).... 8.100 05/01/19 7,198,489
</TABLE>
B-45
See Notes to Financial Statements
<PAGE> 490
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Texas (Continued)
$ 1,000 Colorado River, TX Muni Wtr Dist Wtr Rev Transmission Fac Proj Ser A
(Prerefunded @ 01/01/01) (AMBAC Insd) ........................................ 6.625% 01/01/21 $ 1,107,500
3,655 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg (MBIA
Insd) ........................................................................ 7.700 07/01/11 3,961,801
6,525 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd) .......................... * 02/15/07 3,297,604
6,780 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd) .......................... * 02/15/08 3,179,820
7,705 Dallas Cnty, TX Util & Reclamation Dist (MBIA Insd) .......................... * 02/15/09 3,323,706
475 Dallas Cnty, TX Util & Reclamation Dist (Prerefunded @ 02/15/00) (MBIA Insd).. * 02/15/07 247,926
470 Dallas Cnty, TX Util & Reclamation Dist (Prerefunded @ 02/15/00) (MBIA Insd).. * 02/15/08 227,687
895 Dallas Cnty, TX Util & Reclamation Dist (Prerefunded @ 02/15/00) (MBIA Insd).. * 02/15/09 400,665
2,340 Dallas, TX Wtrwks & Swr Sys Rev Ser A Rfdg & Impt (MBIA Insd) ................ 5.000 10/01/14 2,280,073
2,480 Dallas, TX Wtrwks & Swr Sys Rev Ser A Rfdg & Impt (MBIA Insd) ................ 5.000 10/01/15 2,414,528
23,200 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC Insd) ................... * 11/01/16 2,586,336
3,595 Galveston Cnty, TX Hlth Fac Devereux Fndtn (AMBAC Insd) ...................... 5.000 11/01/14 3,498,510
1,630 Galveston Cnty, TX Hlth Fac Devereux Fndtn (AMBAC Insd) ...................... 5.000 11/01/19 1,541,996
2,745 Harris Cnty, TX Hlth Fac Dev Corp Spl Fac Rev TX Med Cent Proj (MBIA Insd).... 7.375 05/15/20 3,090,486
1,250 Harris Cnty, TX Hlth Fac Dev Corp Thermal Util Rev Teco Proj Ser A
(AMBAC Insd) ................................................................. 7.250 02/15/15 1,387,637
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC Insd) ................ * 08/15/07 2,560,817
245 Henderson, TX (AMBAC Insd) ................................................... 9.125 05/15/04 322,618
16,500 Lower CO River Auth TX Rev Jr Lien 4th Supply Rfdg (FSA Insd) ................ 5.625 01/01/17 16,616,160
5,000 Matagorda Cnty, TX Navigation Dist No 1 Pollutn Ctl Rev Cent Pwr &
Light Co Proj Rfdg (MBIA Insd) ............................................... 6.100 07/01/28 5,163,600
1,975 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser A (FGIC Insd) ............ 5.000 09/01/15 1,869,535
-----------
95,586,920
-----------
Utah 1.5%
5,085 Beaver Cnty, UT Sch Dist (Prerefunded @ 11/01/02) (AMBAC Insd) ............... 6.625 11/01/12 5,765,831
3,000 Payson City, UT Cnty UT Elec Pwr Rev (MBIA Insd) ............................. 8.000 08/15/03 3,296,850
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd) .............................. 10.375 09/15/15 1,104,555
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg) (AMBAC Insd)..... 9.261 05/15/20 4,086,250
500 Uintah Cnty, UT Pollutn Ctl Rev Natl Rural Util Deseret Ser 1984 F
(Prerefunded @ 06/15/01) (AMBAC Insd) ........................................ 10.000 06/15/09 637,670
7,385 Utah St Muni Fin Coop Local Govt Rev Pool Cap Salt Lake (FSA Insd) ........... * 03/01/09 3,702,987
3,115 West Jordan, UT Multi-Family Rev Broadmoor Village Apts Proj Ser A Rfdg
(FSA Insd) ................................................................... 6.800 01/01/15 3,310,902
-----------
21,905,045
-----------
Virginia 0.7%
2,315 Chesapeake Bay Brdg & Tunl Comm VA Dist Rev Genl Resolution Rfdg (MBIA
Insd) ........................................................................ 6.375 07/01/22 2,470,059
4,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ....................................... 6.800 03/01/14 4,544,280
1,125 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp Proj (Prerefunded @
07/01/00) (MBIA Insd) ........................................................ 6.500 07/01/25 1,232,629
750 University of VA Hosp Rev Ser C Rfdg (Prerefunded @ 06/01/00) (AMBAC
Insd) (F4) ................................................................... 0/9.375 06/01/07 812,497
1,500 Virginia St Peninsula Regl Jail Auth Regl Jail Fac Rev (MBIA Insd) ........... 5.500 10/01/18 1,506,510
-----------
10,565,975
-----------
</TABLE>
B-46
See Notes to Financial Statements
<PAGE> 491
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Par
Amount Market
(000) Description Coupon Maturity Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Washington 2.2%
$ 1,250 Franklin Cnty, WA Pub Util Dist No 1 Elec Rev
(Prerefunded @ 09/01/01) (AMBAC Insd) ......................................... 7.100% 09/01/08 $ 1,428,462
350 Pierce Cnty, WA Swr Rev Ser A (MBIA Insd) ..................................... 9.000 02/01/05 452,424
1,000 Snohomish Cnty, WA Solid Waste Rev (MBIA Insd) ................................ 7.000 12/01/10 1,134,230
5,000 Spokane, WA Regl Solid Waste Mgmt Sys Rev (AMBAC Insd) ........................ 6.250 12/01/11 5,415,900
1,000 University of WA Univ Rev Hsg & Dining (MBIA Insd) ............................ 7.000 12/01/21 1,133,670
1,000 Washington St Hlth Care Fac Auth Rev VA Mason Med Cent (MBIA Insd) ............ 8.000 07/01/15 1,075,120
9,435 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C Rfdg (FGIC Insd).. 7.750 07/01/08 10,858,741
3,015 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C Rfdg (MBIA Insd).. * 07/01/04 1,994,091
6,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C Rfdg
(Prerefunded @ 01/01/01) (FGIC Insd) .......................................... 7.375 07/01/11 7,522,125
250 Washington St Pub Pwr Supply Sys Nuclear Proj No 3 Rev Ser A Rfdg BIGI Insd)... 6.000 07/01/18 253,103
----------
31,267,866
----------
West Virginia 0.1%
1,235 South Charleston, WV Hosp Rev Herbert J Thomas Mem Hosp Rfdg
(Prerefunded @ 10/01/98) (MBIA Insd) .......................................... 8.000 10/01/10 1,386,436
-----------
Wyoming 0.2%
2,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd) .......................... 6.700 05/01/12 2,216,500
-----------
Puerto Rico 0.8%
1,000 Puerto Rico Comwlth (AMBAC Insd) .............................................. 5.875 07/01/18 1,044,870
7,750 Puerto Rico Comwlth Rfdg (MBIA Insd) .......................................... 5.375 07/01/22 7,789,603
3,000 Puerto Rico Indl Tourist Edl Med & Environmental Ctl Fac Hosp Auxilio
(MBIA Insd).................................................................... 6.250 07/01/16 3,257,520
-----------
12,091,993
-----------
Total Long-Term Investments 99.7%
(Cost $1,308,250,979) (F1).................................................................... 1,441,054,168
Short-Term Investments at Amortized Cost 2.3%.................................................. 34,300,000
Liabilities in Excess of Other Assets (2.0%)................................................... (29,568,710)
-----------
Net Assets 100%................................................................................ $1,445,785,458
==============
*Zero coupon bond
(FN)
(F1) At December 31, 1995, cost for federal income tax purposes is
$1,308,250,979; the aggregate gross unrealized appreciation is $133,596,887
and the aggregate gross unrealized depreciation is $793,698, resulting in
net unrealized appreciation of $132,803,189.
(F2) Securities purchased on a when issued or delayed delivery basis.
(F3) Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
(F4) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
</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.
<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
AAA........................... 99.6%
AA............................ 0.2
BBB........................... 0.1
B............................. 0.1
=======
100.0%
=======
</TABLE>
B-47
See Notes to Financial Statements
<PAGE> 492
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
December 31, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $1,308,250,979) (Note 1)............................... $ 1,441,054,168
Short-Term Investments (Note 1)........................................................... 34,300,000
Cash...................................................................................... 1,440,794
Receivables:
Investments Sold........................................................................ 24,020,546
Interest................................................................................ 22,992,856
Fund Shares Sold........................................................................ 636,476
Other..................................................................................... 53,765
-----------------
Total Assets......................................................................... 1,524,498,605
-----------------
Liabilities:
Payables:
Investments Purchased................................................................... 73,398,336
Income Distributions.................................................................... 1,934,434
Fund Shares Repurchased ................................................................ 1,164,652
Investment Advisory Fee (Note 2)........................................................ 604,455
Accrued Expenses.......................................................................... 1,611,270
-----------------
Total Liabilities.................................................................... 78,713,147
-----------------
Net Assets................................................................................ $ 1,445,785,458
=================
Net Assets Consist of:
Paid in Surplus (Note 3).................................................................. $ 1,318,535,381
Net Unrealized Appreciation on Investments................................................ 132,803,189
Accumulated Distributions in Excess of Net Investment Income.............................. (50,709)
Accumulated Net Realized Loss on Investments.............................................. (5,502,403)
-----------------
Net Assets................................................................................ $ 1,445,785,458
=================
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $1,365,380,085
and 69,845,771 shares of beneficial interest issued and outstanding) (Note 3)........ $ 19.55
Maximum sales charge (4.75%* of offering price)...................................... .97
-----------------
Maximum offering price to public.......................................................... $ 20.52
=================
Class B Shares:
Net asset value and offering price per share (Based on net assets of $75,278,779 and
3,850,770 shares of beneficial interest issued and outstanding) (Note 3)............. $ 19.55
=================
Class C Shares:
Net asset value and offering price per share (Based on net assets of $5,126,594 and
262,260 shares of beneficial interest issued and outstanding) (Note 3)............... $ 19.55
=================
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 493
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended December 31, 1995
- ---------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest..................................................................... $ 80,236,681
----------------
Expenses:
Investment Advisory Fee (Note 2)............................................. 5,813,647
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of
$2,809,295, $441,670, $38,605 and $15, respectively) (Note 6) ............... 3,289,585
Shareholder Services (Note 2) ............................................... 1,517,092
Legal (Note 2)............................................................... 68,500
Trustees Fees and Expenses (Note 2).......................................... 38,004
Insurance (Note 1)........................................................... 36,426
Other........................................................................ 801,913
----------------
Total Expenses............................................................... 11,565,167
Less Expenses Reimbursed..................................................... 13,125
----------------
Net Expenses................................................................. 11,552,042
----------------
Net Investment Income........................................................ $ 68,684,639
================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.......................................................... $ 885,555,764
Cost of Securities Sold...................................................... (882,920,002)
----------------
Net Realized Gain on Investments (Including realized loss on futures
transactions of $5,991,342).................................................. 2,635,762
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period...................................................... (3,089,839)
End of the Period............................................................ 132,803,189
----------------
Net Unrealized Appreciation on Investments During the Period................. 135,893,028
----------------
Net Realized and Unrealized Gain on Investments.............................. $ 138,528,790
================
Net Increase in Net Assets from Operations................................... $ 207,213,429
================
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 494
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.............................................. $ 68,684,639 $ 68,012,858
Net Realized Gain on Investments................................... 2,635,762 6,340,550
Net Unrealized Appreciation/Depreciation on Investments
During the Period................................................ 135,893,028 (154,941,139)
----------------- -----------------
Change in Net Assets from Operations .............................. 207,213,429 (80,587,731)
----------------- -----------------
Distributions from Net Investment Income*.......................... (68,722,447) (68,248,932)
Distributions in Excess of Net Investment Income* (Note 1)......... (319,378) -0-
----------------- -----------------
Distributions from and in Excess of Net Investment Income*....... (69,041,825) (68,248,932)
----------------- -----------------
Net Change in Net Assets from Investment Activities................ 138,171,604 (148,836,663)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold.......................................... 373,367,935 145,835,342
Net Asset Value of Shares Issued Through Dividend Reinvestment..... 47,663,019 46,938,996
Cost of Shares Repurchased......................................... (257,166,907) (155,893,379)
----------------- -----------------
Net Change in Net Assets from Capital Transactions................. 163,864,047 36,880,959
----------------- -----------------
Total Increase/Decrease in Net Assets.............................. 302,035,651 (111,955,704)
Net Assets:
Beginning of the Period............................................ 1,143,749,807 1,255,705,511
----------------- -----------------
End of the Period (Including undistributed net investment income
of $(50,709) and $37,808, respectively).......................... $ 1,445,785,458 $ 1,143,749,807
================= =================
</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............................................ $ (66,799,203) $ (66,735,561)
Class B Shares............................................ (2,061,251) (1,291,269)
Class C Shares............................................ (181,333) (222,010)
Class D Shares............................................ (38) (92)
----------------- -----------------
$ (69,041,825) $ (68,248,932)
================= =================
</TABLE>
See Notes to Financial Statements
B-50
<PAGE> 495
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -----------------------------------------------------------------------------------------------------------------------------------
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........................................................ $17.572 $19.857 $18.721 $18.478 $17.825
------- ------- ------- ------- -------
Net Investment Income.......................................................... 1.021 1.051 1.107 1.146 1.153
Net Realized and Unrealized
Gain/Loss on Investments.................................................... 1.982 (2.280) 1.145 .561 .681
------- ------- ------- ------- -------
Total from Investment Operations................................................. 3.003 (1.229) 2.252 1.707 1.834
------- ------- ------- ------- -------
Less:
Distributions from and in Excess of
Net Investment Income....................................................... 1.026 1.056 1.116 1.140 1.160
Distributions from Net
Realized Gain on Investments................................................ -0- -0- -0- .324 .021
------- ------- ------- ------- -------
Total Distributions.............................................................. 1.026 1.056 1.116 1.464 1.181
------- ------- ------- ------- -------
Net Asset Value, End of the Period............................................... $19.549 $17.572 $19.857 $18.721 $18.478
======= ======= ======= ======= =======
Total Return..................................................................... 17.49% (6.31%) 12.32% 9.51% 10.62%
Net Assets at End of the Period
(In millions).................................................................. $1,365.4 $1,110.2 $1,230.0 $ 999.9 $ 833.2
Ratio of Expenses to Average
Net Assets (Annualized)........................................................ .88%* .88% .84% .83% .88%
Ratio of Net Investment
Income to Average
Net Assets (Annualized)........................................................ 5.44%* 5.70% 5.69% 6.14% 6.39%
Portfolio Turnover............................................................... 70.12% 48.46% 78.73% 111.90% 113.25%
</TABLE>
* The Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets were not affected by the assumption of certain expenses by
VKAC.
See Notes to Financial Statements
B-51
<PAGE> 496
<TABLE>
<CAPTION>
Financial Highlights (Continued)
- -------------------------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------------------------
May 1, 1993
(Commencement of
Class B Shares Year Ended Year Ended Distribution) to
December 31, 1995 December 31, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of the Period.......................................... $17.563 $19.824 $19.320
------- ------- -------
Net Investment Income............................................ .890 .899 .619
Net Realized and Unrealized
Gain/Loss on Investments ..................................... 1.978 (2.276) .513
------- ------- -------
Total from Investment Operations................................... 2.868 (1.377) 1.132
Less Distributions from and in Excess of
Net Investment Income............................................ .882 .884 .628
------- ------- -------
Net Asset Value, End of the Period................................. $19.549 $17.563 $19.824
======= ======= =======
Total Return....................................................... 16.67% (7.03%) 5.92%*
Net Assets at End of the Period (In millions)...................... $75.3 $30.0 $20.8
Ratio of Expenses to Average Net
Assets (Annualized).............................................. 1.67%** 1.71% 1.68%
Ratio of Net Investment Income to
Average Net Assets (Annualized).................................. 4.69%** 4.88% 4.25%
Portfolio Turnover................................................. 70.12% 48.46% 78.73%
</TABLE>
* Non-Annualized
** The Ratios of Expenses to Average Net Assets and Net Investment
Income to Average Net Assets were not affected by the assumption
of certain expenses by VKAC.
See Notes to Financial Statements
B-52
<PAGE> 497
<TABLE>
Financial Highlights (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ----------------------------------------------------------------------------------------------------------------------------------
<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.................................. $17.568 $19.823 $19.650
------- ------- -------
Net Investment Income.................................... .883 .908 .350
Net Realized and Unrealized
Gain/Loss on Investments............................ 1.979 (2.279) .181
------- ------- -------
Total from Investment Operations........................... 2.862 (1.371) .531
Less Distributions from and in Excess of
Net Investment Income.................................... .882 .884 .358
------- ------- -------
Net Asset Value, End of the Period......................... $19.548 $17.568 $19.823
======= ======= =======
Total Return............................................... 16.60% (6.98%) 2.70%*
Net Assets at End of the Period (In millions).............. $ 5.1 $ 3.5 $ 5.0
Ratio of Expenses to Average Net
Assets (Annualized)...................................... 1.67%** 1.70% 1.68%
Ratio of Net Investment Income to
Average Net Assets (Annualized).......................... 4.68%** 4.89% 4.21%
Portfolio Turnover......................................... 70.12% 48.46% 78.73%
</TABLE>
* Non-Annualized
** The Ratios of Expenses to Average Net Assets and Net Investment Income to
Average Net Assets were not affected by the assumption of certain expenses
by VKAC.
See Notes to Financial Statements
B-53
<PAGE> 498
Notes to Financial Statements
December 31, 1995
1. Significant Accounting Policies
Van Kampen American Capital Insured Tax Free Income Fund (the "Fund")
is organized as a series of Van Kampen American Capital Tax-Free Fund (the
"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 investors with a high
level of current income exempt from federal income taxes, with liquidity and
safety of principal, primarily through an investment in a diversified portfolio
of insured municipal securities. The Fund commenced the distribution of its
Class B and Class C shares on May 1, 1993 and August 13, 1993, respectively. On
May 2, 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 aredetermined 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. 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 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 $5,502,403. Of this amount, $91,852, $17,995, $110,103,
$595,553, $319,218 and $4,367,682 will expire on December 31, 1996, 1997, 2000,
2001, 2002 and 2003, respectively. On December 31, 1995, $5,073,610 of the
Fund's capital loss carryforward expired, resulting in a permanent book and tax
basis difference. Accordingly, this difference was reclassified from
accumulated net realized loss on investments to Class A share paid in surplus.
B-54
<PAGE> 499
Notes to Financial Statements (Continued)
December 31, 1995
- ------------------------------------------------------------------------------
E. Distribution of Income and Gains--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes. Permanent book and tax basis differences relating to shareholder
distributions totaling $55,897 have been reclassified from undistributed net
investment income to accumulated net realized gain/loss on investments. For
Federal income tax purposes, expenses related to the production of tax-exempt
income do not reduce current earnings and profits, thus creating permanent book
and tax basis differences relating to the recognition of expenses totaling
$31,167. These differences in addition to permanent differences relating to the
recognition of expenses associated with fund mergers (see note 3) totaling
$190,000, have been reclassified from accumulated undistributed net investment
income to paid in surplus.
F. Insurance Expenses--The Fund typically invests in insured bonds. Any
portfolio securities not specifically covered by a primary insurance policy are
insured secondarily through the Fund's portfolio insurance policy. Insurance
premiums are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance
policy guarantees the timely payment of principal and interest on the
securities in the Fund's portfolio.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ---------------------------------------------------------------------------
<S> <C>
First $500 million............................................ .525 of 1%
Next $500 million............................................. .500 of 1%
Next $500 million............................................. .475 of 1%
Over $1.5 billion............................................. .450 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 $323,700 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") 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 period
ended December 31, 1995, the Fund recognized expenses of approximately
$614,500, 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 $53,900.
At December 31, 1995, VKAC owned 100 shares each of Classes B and C.
B-55
<PAGE> 500
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.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1995, paid in surplus aggregated $1,240,439,855, $72,835,537
and $5,259,989 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..................................... 17,358,362 $ 324,651,466
Class B..................................... 2,506,874 46,741,719
Class C..................................... 105,778 1,974,750
Class D..................................... -0- -0-
------------ -------------
Total Sales.................................... 19,971,014 $ 373,367,935
============ =============
Dividend Reinvestment:
Class A..................................... 2,467,735 $ 46,428,605
Class B..................................... 56,865 1,075,245
Class C..................................... 8,455 159,166
Class D..................................... -0- 3
------------ -------------
Total Dividend Reinvestment.................... 2,533,055 $ 47,663,019
============ =============
Repurchases:
Class A..................................... (13,162,194) $(248,224,027)
Class B..................................... (422,533) (7,986,889)
Class C..................................... (51,141) (953,892)
Class D..................................... (111) (2,099)
------------ -------------
Total Repurchases.............................. (13,635,979) $(257,166,907)
============ =============
</TABLE>
At December 31, 1994, paid in surplus aggregated $1,116,662,803, $33,016,541,
$4,080,719 and $2,096 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 6,865,303 $ 128,013,313
Class B...................................... 806,590 15,092,543
Class C...................................... 151,670 2,727,397
Class D...................................... 111 2,089
------------ -------------
Total Sales..................................... 7,823,674 $ 145,835,342
============= =============
Dividend Reinvestment:
Class A...................................... 2,505,940 $ 45,999,603
Class B...................................... 41,052 750,173
Class C...................................... 10,294 189,213
Class D...................................... -0- 7
------------ -------------
Total Dividend Reinvestment..................... 2,557,286 $ 46,938,996
============ =============
Repurchases:
Class A...................................... (8,130,723) $(148,756,423)
Class B...................................... (185,936) (3,383,930)
Class C...................................... (213,783) (3,753,026)
Class D...................................... -0- -0-
------------ -------------
Total Repurchases............................... (8,530,442) $(155,893,379)
============= ==============
</TABLE>
B-56
<PAGE> 501
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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
$601,200 and CDSC on the redeemed shares of Classes B, C and D of approximately
$150,500. Sales charges do not represent expenses of the Fund.
On September 27, 1995, the Fund acquired all of the assets and
liabilities of the Van Kampen American Capital Tax-Exempt Trust-Insured
Municipal Portfolio (the "AC Fund"), through a tax free reorganization approved
by AC Fund share holders on September 21, 1995. The Fund issued 3,513,425 Class
A shares, 1,958,037 Class B shares and 73,421 Class C shares valued at
$65,701,115, $36,595,879 and $1,372,231, respectively, in exchange for AC
Fund's net assets. Included in these net assets was a capital loss
carryforward of $6,195,557 which is included in accumulated net realized
gain/loss on investments and cumulative book and tax basis timing differences
of $8,395 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 $1,236,253,953.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $1,049,348,266 and
$882,920,002, 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. Futures Contracts--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
Index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
B-57
<PAGE> 502
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1994..................................... 735
Futures Opened....................................................... 7,750
Futures Closed....................................................... (8,485)
---------
Outstanding at December 31, 1995..................................... -0-
=========
</TABLE>
B. Indexed Securities--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. As the floating
rate rises, the coupon is reduced. Conversely, as the floating rate declines,
the coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $566,400.
B-58
<PAGE> 503
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
Van Kampen American Capital California Insured Tax Free Fund, formerly known
as Van Kampen Merritt California Insured Tax Free Fund (the "Fund"), is a
separate diversified series of Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "Trust"). The Trust is an open-end management
investment company, commonly known as a mutual fund. The Fund's investment
objective is to provide investors with a high level of current income exempt
from federal and California income taxes, with liquidity and safety of principal
primarily through investment in a diversified portfolio of insured California
municipal securities. All of the municipal securities in the portfolio of the
Fund will be insured by AMBAC Indemnity Corporation or by other municipal bond
insurers whose claims-paying ability is rated "AAA" by Standard & Poor's Ratings
Group on the date of purchase. The Fund's portfolio is managed by Van Kampen
American Capital Advisory Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated 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.
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. This omitted information may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Description of Municipal Securities Ratings............................................. B-23
Trustees and Officers................................................................... B-28
Investment Advisory and Other Services.................................................. B-37
Custodian and Independent Auditors...................................................... B-38
Portfolio Transactions and Brokerage Allocation......................................... B-38
Tax Status of the Fund.................................................................. B-39
The Distributor......................................................................... B-39
Legal Counsel........................................................................... B-41
Performance Information................................................................. B-41
Independent Auditors' Report............................................................ B-43
Financial Statements.................................................................... B-44
Notes to Financial Statements........................................................... B-54
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 504
THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust, an open-end
diversified management investment company commonly known as a mutual fund. The
Trust is an unincorporated business trust established under the laws of the
State of Delaware by an Agreement and Declaration of Trust dated as of May 10,
1995 (the "Declaration of Trust"). The Declaration of Trust permits the Trustees
to create one or more separate investment portfolios and have a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio. At present, the Fund, Van
Kampen American Capital Tax Free High Income Fund, Van Kampen American Capital
Municipal Income Fund, Van Kampen American Capital Insured Tax Free Income Fund,
Van Kampen American Capital 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
commercial investment operations. Van Kampen American Capital California Tax
Free Income Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van
Kampen American Capital Missouri Tax Free Income Fund and Van Kampen American
Capital Ohio Tax Free Income Fund have been organized as series of the Trust but
have not commenced investment operations. Other series may be organized and
offered in the future. The Fund was originally organized under the name Van
Kampen Merritt California Insured Tax Free Fund as a sub-trust of Van Kampen
Merritt Tax Free Fund, a Massachusetts business trust. The Fund was reorganized
as a series of the Trust and adopted its present name as of July 31, 1995.
Each share in a series of the Trust represents an equal proportionate interest
in the assets of such series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights other than those described in the Prospectus.
The Trust does not contemplate holding regular meetings of shareholders to elect
Trustees or otherwise. However, the holders of 10% or more of the outstanding
shares may by written request require a meeting to consider the removal of
Trustees by a vote of two-thirds of the shares then outstanding cast in person
or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the outstanding shares of each affected
series entitled to vote (or such higher vote as may be required by the
Investment Company Act of 1940, as amended (the "1940 Act") or other applicable
law).
Statements contained in this Statement of Additional Information to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund
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would hold more than 10% of the outstanding voting securities or any
single issuer, except that up to 25% of the Fund's total assets may be
invested without regard to such limitation.
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described in the
Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax exempt money market funds that
invest in securities rated comparably to those in which the Fund may
invest so long as the Fund does not own more than 3% of the outstanding
voting stock of any tax exempt money market fund or securities of any tax
exempt money market fund aggregating in value more than 5% of the total
assets of the Fund.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate commodities or commodity contracts, except as
set forth in item 6 above and except to the extent the municipal
securities in which the Fund may invest are considered to be interests in
real estate.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were
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one year or less are excluded from such calculation. The Fund anticipates that
its annual portfolio turnover rate will normally be less than 100%.
The Fund does not intend to invest in certain "private activity" obligations
issued after August 7, 1986. Interest on such "private activity" obligations is
treated as a preference item for the purpose of calculating the alternative
minimum tax. If the Fund were to invest in such "private activity" obligations,
dividends paid to an investor who is subject to the alternative minimum tax
might not be completely tax exempt or might cause an investor to be subject to
such tax.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
leases and participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
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The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
Although the municipal securities in which the Fund may invest will be insured
as to timely payment of principal and interest, municipal securities, like other
debt obligations, are subject to the risk of non-payment. The ability of issuers
of municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such non-payment would result in a reduction of income to
the Fund, and could result in a reduction in the value of the municipal security
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal securities and the Fund may not, in all circumstances, be able
to collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
Any income derived from the Fund's ownership or operation of such assets may not
be tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue Code of 1986, as amended (the
"Code"), may limit the extent to which the Fund may exercise its rights by
taking possession of such assets, because as a regulated investment company the
Fund is subject to certain limitations on its investments and on the nature of
its income. See "Tax Status of the Fund."
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable.
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The sale of restricted and illiquid securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES. As
described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in California municipal securities. The
portfolio of the Fund may include securities issued by the State of California
(the "State"), by its various public bodies (the "Agencies") and/or by other
municipal entities located within the State (securities of all such entities are
referred to herein as "California municipal securities").
In addition, the specific California municipal securities in which the Fund
will invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of California municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund and the Fund assumes no responsibility for
the completeness or accuracy of such information. Additionally, many factors,
including national, economic, social and environmental policies and conditions,
which are not within the control of such issuers, could have an adverse impact
on the financial condition of such issuers. The Fund cannot predict whether or
to what extent such factors or other factors may affect the issuers of
California municipal securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on or principal of such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no assurance on the part of the State of California to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of California municipal securities.
Constitutional Limits on Spending and Taxes. Certain California municipal
securities may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem real property taxes as a source of
revenue. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, the Jarvis/Gann Initiative, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues. On June 18, 1992, the United
States Supreme Court upheld the constitutionality of Article XIIIA.
In 1979, the voters of California passed an amendment adding Article XIIIB to
the California Constitution, the effect of which is to significantly limit
spending by State government and by "local government" (defined as "any city,
county, city and county, school district, special district, authority, or other
political subdivision of or within the state"). Excluded from these limitations
on government entities is "debt service" (defined as "appropriations required to
pay the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally authorized as of January 1, 1979 or on bonded indebtedness
thereafter approved" by the voters of the issuing entity).
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In November 1986, California voters approved an amendment to the California
Government Code known as Proposition 62 which added Article 3.7 to Title 5,
Division 2, Chapter 4 of the California Government Code. The effect of Article
3.7 is to limit the abilities of local governments to impose new taxes or
increase existing taxes by requiring certain legislative and voter approvals
prior to the imposition of certain taxes by any local government (defined as any
county, city, city and county, including a chartered city or county, or any
public or municipal corporation) or district (defined as any agency of the
state, formed pursuant to general law or special act, for the local performance
of governmental or proprietary functions within limited boundaries). Article 3.7
can be amended only by a vote of the electorate of the State of California. In
particular, Article 3.7, among other things, requires (i) two-thirds approval of
all members of the applicable legislative body followed by majority approval of
the voters voting in an election in order for a local government or district to
impose any general tax (defined as any tax imposed for general governmental
purposes), and (ii) two-thirds approval of the voters voting in an election in
order for a local government or district to impose any special tax (defined as
any tax imposed for a specific purpose). Those voting requirements do not apply
to ad valorem taxes to pay interest and redemption charges on any indebtedness
approved by the voters prior to the effective date of Article XIIIA of the
California Constitution. Article 3.7 requires (1) that the revenues from a
special tax be used only for the purpose or service for which the tax was
imposed, and (2) any tax subject to the measure imposed by any local government
or district on or after August 1, 1985 be ratified by majority vote of the
voters voting in an election held within two years after the effective date of
the measure in order for the tax to continue to be imposed on and after November
15, 1988. Article 3.7 contains a provision which diminishes the property tax
revenues allocated to a local government or district to the extent that the
local government or district imposed any tax not in compliance with Article 3.7.
Article 3.7 also provides that no local government or district may impose any ad
valorem tax on real property other than as permitted by Section 1 of Article
XIIIA of the California Constitution, and that no local government or district
may impose any transaction tax or sales tax on the sale of real property within
the city, county or district. A 1988 decision of the Fourth Appellate District
of the California Court of Appeals declared that the requirement of local voter
ratification provided for in Article 3.7 violated the California Constitution.
An initiative proposed to re-enact the ratification provisions of Article 3.7 as
a constitutional amendment was defeated by the voters in November 1990, but such
a proposal may be renewed in the future.
On December 19, 1991, the California Supreme Court declared a 1988 San Diego
County Ballot measure that raised sales taxes for the purpose of financing
construction of criminal detention and courthouse facilities unconstitutional
because it was not passed with two-thirds voter approval. The court concluded
that the agency established to finance the facilities is a special district
created to circumvent Article XIIIA. However, in May 1992, the California
Supreme Court let stand two lower court decisions involving sales tax increases
passed by a majority vote. The lower courts had held that the Los Angeles County
Transportation Commission and the Orange County Transportation Authority, the
agencies entitled to collect the taxes, were not formed to circumvent Article
XIIIA, and that, therefore, the taxes were validly passed. On November 10, 1993,
in a closely watched case involving a Santa Clara County transportation
authority created with the parameters of the California Supreme Court's 1991
decision in mind, a California Court of Appeal overturned a sales tax approved
by less than two-thirds of the voters. In a September 1995 decision, the State
Supreme Court affirmed the Court of Appeal, declaring Proposition 62
constitutional under the California Constitution. The petitioners have filed for
a rehearing. The decision limited itself to cities organized by the State and
left unresolved whether Proposition 62 is constitutional as applied to cities
organized under a charter. Approximately half the population of the State
resides in charter cities. In March 1996, a Superior Court held that charter
cities do not have to submit taxes to voter approval despite the State Supreme
Court's Proposition 62 ruling . These decisions may continue to cast doubt on
other projects around the State that have been financed with sales tax increases
imposed without two-thirds voter approval. Soon after the State Supreme Court
decision, Moody's Investors Services, Inc. indicated that the ruling has broad
negative implications on the ability of the State's cities and counties to raise
revenue and issue debt supported by general fund revenues.
Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and
possible inconsistencies in their respective terms, and the applicability of
their respective exemptions and exceptions and the impossibility of predicting
future appropriations, it is not presently possible to determine the impact of
Article XIIIA or XIIIB or any implementing or related legislation on the
California municipal securities in which the Fund
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may invest, or the abilities of State or local governments to pay the interest
on, or repay the principal of such California municipal securities.
Recent Developments. From 1990 until 1994 the State experienced the worst
economic fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, have
all been severely affected. Job losses were the worst of any post-war recession.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-14
education, health, welfare and corrections -- growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of chronic budget imbalance.
A further consequence of the large budget imbalances in the 1990-91 and
1991-92 fiscal years was that the State used up all of its available cash
resources. In late June, 1992, the State was required to issue $475 million of
short-term revenue anticipation warrants to cover General Fund obligations
coming due on June 30. These warrants were repaid on July 24, 1992. With the
failure of the Governor and Legislature to adopt a budget for the 1992-93 fiscal
year on time (to allow the State to carry out its usual cash flow borrowing for
the fiscal year), the shortfall of cash forced the State Controller after July
1, 1992 to issue interest-bearing "registered warrants" in lieu of regular
warrants redeemable for cash to many State vendors, suppliers, and employees and
to local government agencies. Until the State budget was adopted on September 2,
1992, the Controller issued registered warrants totaling approximately $3.8
billion to pay valid obligations from the prior fiscal year, and to pay
continuing obligations after July 1 based on special appropriations or court
orders. Certain constitutionally mandated obligations, such as debt service on
bonds and revenue anticipation warrants, were paid with available cash.
Registered warrants had not been issued by the State since the 1930s. State
employees filed suit against the State alleging that payment of their salaries
with registered warrants violated federal labor laws. See "Litigation" below.
As a result of the deterioration in the State's budget and cash situation
since the 1991-92 fiscal year, rating agencies reduced the State's credit
rating. Between October 1991 and October 1992, the rating on the general
obligation bonds was reduced by Standard & Poor's Ratings Group from "AAA" to
"A+", by Moody's Investors Services, Inc. from "Aaa" to "Aa" and by Fitch
Investors Services, Inc. from "AAA" to "AA". On July 15, 1994, all three of the
rating agencies rating the State's long-term debt again lowered their ratings of
the State's general obligation bonds. Moody's Investors Services, Inc. lowered
its rating from "Aa" to "A1", Standard & Poor's Ratings Group lowered its rating
from "A+" to "A" and termed its outlook as "stable", and Fitch Investors Service
lowered its rating from "AA" to "A". There can be no assurance that such ratings
will continue for any given period of time or that they will not in the future
be further revised or withdrawn. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and there is
no obligation on the part of the State to make payment on such obligations in
the event of default.
In November of 1994, Standard & Poor's Rating Group downgraded the credit
rating of several California counties, including San Francisco, San Diego,
Marin, Los Angeles and San Bernadino. In December of 1994 and January of 1995,
Standard & Poor's Rating Group and Moody's Investors Services, Inc.,
respectively, downgraded Orange County to below investment grade as a result of
its bankruptcy filing (see discussion below). In August of 1995, Standard &
Poor's Rating Group again downgraded the credit rating of Los Angeles County and
placed it on CreditWatch. Moody's Investors Services, Inc. also downgraded Los
Angeles County. In October of 1995, Standard & Poor's Rating Group placed San
Diego County's $449.3 million in general fund-supported debt issues on
CreditWatch.
On January 17, 1994 an earthquake of the magnitude of an estimated 6.8 on the
Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Current estimates of total property damage
(private and public) are in the range of $20 billion. Although some individuals
and businesses suffered losses totaling in the billions of dollars, the overall
effect of the earthquake on the regional and State economy is not expected to be
serious. The State in conjunction with the federal government is committed to
providing assistance to local governments, individuals and businesses suffering
damage as a result of the earthquake, as well as to providing for the repair and
replacement of State-owned facilities.
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Revised employment data indicate that California's recession ended in 1993,
and following a period of stability, a recovery is now underway. The State's
unemployment rate fell sharply in 1994, from 10.1 percent in January to 7.7
percent in October and November of 1994. The gap between the national and
California jobless rates narrowed from 3.4 percentage points at the beginning of
1994 to an average or 2 percentage points in October and November. The number of
unemployed Californians fell by nearly 400,000 during 1994, while civilian
employment increased more than 300,000. Employment in the State grew 1.5% from
December 1994 to December 1995. The unemployment rate as of December 1995 was
7.7%.
For the first time in four years, the State entered the 1995-1996 fiscal year
with strengthening revenues based on an improving economy. Nonetheless, serious
policy differences between the Governor and the Legislature prevented timely
enactment of the budget. The 1995-96 Budget Act was signed by the Governor on
August 3, 1995, 34 days after the start of the fiscal year. The Budget Act
projected revenues and transfers of $44.1 billion (an increase of 3.5 percent
over 1994-95). Expenditures were budgeted at $43.4 billion (a 4 percent increase
over 1994-95). The Department of Finance projected that, after repaying the last
of the carryover budget deficit, there would be a positive balance of $28
million in the budget reserve at June 30, 1996. The Budget Act also projected
Special Fund revenues of $12.7 billion and appropriated Special Fund
expenditures of $13.0 billion.
The Governor's Proposed Budget for the 1996-97 Fiscal Year (the "Proposed
Budget"), released on January 10, 1996, updated the current year projections, so
that revenues and transfers are estimated to be $45.0 billion, and expenditures
to be $44.2 billion. The budget reserve is projected to be about $50 million at
June 30, 1996, and on that date, available internal borrowable resources
(available cash, after payment of all obligations due) will be about $2.2
billion. The Administration projects it will issue up to $2.0 billion of revenue
anticipation notes in April 1996, to mature by June 30, 1996 to assist in cash
flow management for the final two months of the year. Four months into the 1996
fiscal year, the State's General Fund had a $676 million revenue surplus due to
better than expected economic recovery.
The Proposed Budget projects revenues and transfers of about $45.6 billion,
which would leave a budget reserve at June 30, 1997 of about $400 million. The
Governor renewed a proposal, which had been rejected by the Legislature in 1995,
for a 15 percent phased cut in individual and corporate tax rates over three
years (the Proposed Budget assumes this will be enacted, reducing revenues in
1996-97 by about $600 million). The Proposed Budget projects external cash flow
borrowing of up to $32 billion, to mature by June 30, 1997.
Budget figures computed by the Controller and the Department of Finance may
differ from each other due to differences in accounting methods and
interpretation. It is not presently possible (1) to know whether, and to what
extent, the State General Fund or any Special Funds will have surplus or deficit
balances in the 1995-1996 fiscal year or in any subsequent fiscal year, or (2)
to determine the overall impact of any deficits on future allocations of the
State revenues to local governments or on the abilities of State or local
governments to pay the interest on, or repay the principal of, any California
municipal securities in which the Fund may invest.
On December 6, 1994, Orange County, California (the "County"), together with
its pooled investment funds (the "Funds") filed for protection under Chapter 9
of the federal Bankruptcy Code, after reports that the Funds had suffered
significant market losses in their investments, causing a liquidity crisis for
the Funds and the County. More than 200 other public entities, most of which,
but not all, are located in the County, were also depositors in the Funds. As of
mid-January, 1995, following a restructuring of most of the Funds' assets to
increase their liquidity and reduce their exposure to interest rate increases,
the County estimated the Funds' loss at about $1.69 billion, or 23% of their
initial deposits of approximately $7.5 billion. Many of the entities which
deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations. The County has technically defaulted upon several of
its outstanding debt issues and its ability to meet its outstanding obligations
is unclear. The County has embarked on a fiscal recovery plan based on sharp
reductions in services and personnel, and rescheduling of outstanding short term
debt using certain new revenues transferred to the County from other local
governments pursuant to special legislation enacted in October, 1995.
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Orange County voters recently rejected a sales tax hike of one-half cent,
which would have brought the county closer to repaying $800 million of its notes
maturing in July and August. As a result, Standard and Poor's has lowered the
rating on such notes to a "D" default rating, despite the nearly unanimous
approval to a one-year extension of such notes by the noteholders. As of
February 1996, Orange County was considering the issuance of $800 million in
debt securities by June 1996.
The Fund is not presently able to predict whether any other municipalities
will face insolvency because of their participation in the Funds, and if so, the
potential impact on such municipalities' ability to meet its outstanding
obligations. The Governor has called a special session of the Legislature which
is expected to consider various responses to the County situation.
The Mexican currency crisis is expected to have some mild dampening effect on
the California economy; however, it should not endanger the recovery. The peso's
devaluation has made California exports 40 percent more expensive in Mexican
markets. Although the economic impact of this is unknown, an export reduction of
20 percent would reduce trade by approximately $1.5 billion. This represents
less than two percent of all exports through California ports. San Diego,
however, is likely to be more severely affected due to substantial reductions in
cross-border traffic. Although the long-run impacts of the devaluation are
unclear, the fundamentals of the Mexican economy are much stronger than during
the last crisis twelve years ago.
As a part of its cash management program, California regularly issues revenue
anticipation notes ("California notes") and revenue anticipation warrants to
meet cash flow needs during the course of a fiscal year. Between spring 1992 and
summer 1994, the State depended upon external borrowing, including borrowings
extending into the subsequent fiscal year, to meet its cash needs, including
repayment of maturing notes and warrants. To meet its cash flow needs in the
1994-1995 Fiscal Year, the State issued in July and August, 1994, $4.0 billion
of revenue anticipation notes maturing on April 24, 1996 and $3.0 billion of
revenue anticipation notes which matured and were timely repaid on June 28,
1995. It is anticipated that the State will not need to resort to such
cross-year borrowing during the 1995-96 fiscal year. As of December 31, 1995,
issuances of debt by state agencies have aggregated $19 billion.
In June 1995, Los Angeles County unveiled an $11.1 billion budget proposal for
fiscal year ended 1996 designed to cut $1.2 billion from county government and
approximately 18,000 jobs. In August 1995, Standard and Poor's downgraded Los
Angeles County from an A-plus to A-minus and kept it on the CreditWatch it was
placed on in June 1995. In addition, Moody's downgraded Los Angeles County from
A1 to A. The budget for fiscal year ended 1996 was balanced in reliance on $300
million in state and federal funding which may not be forthcoming.
Los Angeles County taxpayers filed a lawsuit in 1995 in Superior Court
entitled Stanley G. Auerbach, Norbert Pactowski and Elroy Fierro vs. Board of
Supervisors, Los Angeles County, et. al., alleging that Los Angeles County
illegally misappropriated $990.6 million from restricted funds to cover its
budget deficit from January to July of 1995.
Proposition 98. On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"). The Act changes
State funding of public education below the university level and the operation
of the State's Appropriations Limit. The Act, as amended, guarantees State
funding for K-12 school districts and community college districts at a level
equal to the greater of (a) in general, a fixed percentage of General Fund
revenues, (b) the amount actually appropriated to such districts from the
General Fund in the previous fiscal year, adjusted for either changes in the
cost of living, or (c) a third test which would replace the test in (b) if the
percentage growth in per capita of General Fund revenues in the prior year plus
one half of one percent is less than the percentage growth in California per
capita personal income. Under the test in (c), the schools would receive the
amount appropriated in the prior year adjusted for changes in enrollment and
General Fund revenues. The Act permits the legislature, by two-thirds vote of
both houses, with the Governor's concurrence, to suspend this formula for a
one-year period. The Act could cause increasing pressure on the State's budget
over future years, potentially reducing resources available for other State
programs, especially to the extent the Article XIIIB spending limit would
restrain the State's ability to fund such other programs by raising taxes. The
Act also changes how tax revenues in excess of the State's Appropriations Limit
are distributed. Any excess State tax revenues up to a specified amount would,
instead of
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being returned to taxpayers, be transferred to K-12 school and community college
districts. Such transfer would be excluded from the Appropriations Limit for
K-14 school districts, and the K-14 school Appropriations Limits for the next
year would be automatically increased by the amount of such transfer. These
additional moneys would enter the base funding calculation for K-14 schools for
subsequent years, creating further pressure on other portions of the state
budget, particularly if revenues decline in a year following such a transfer.
Litigation. At any given time, including the present, there are numerous civil
actions pending against the State (including, but not limited to, those
discussed in the preceding paragraphs and below), which could, if determined
adversely to the State, affect the State's expenditures and, in some cases, its
revenues. The following are certain of the more significant lawsuits pending
against the State.
In the spring of 1991, the Richmond Unified School District ("RUSD") Board of
Directors attempted to end classes six weeks early because of a fiscal crisis.
In response to lawsuits, a lower court judge, in a case called Butt v. State of
California, ordered the State, over objections from the Governor, to provide
funding to allow the school year to be completed, and an emergency loan was
arranged by the State Controller. On appeal, the California Supreme Court in
late December 1992 upheld the lower court's action, ruling that the State
Constitution's guarantee of public education required the State to ensure a full
year's education in all school districts. The Court, however, overturned a
portion of the original order relating to the source of funds for RUSD's
emergency loan: the decision leaves unclear just where the State must find funds
to make any future loans of this kind.
In the Yuba River flood litigation, the trial court has found liability in
inverse condemnation and awarded of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 30 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. The appellate court affirmed the trial court. The State
is pursuing its remaining appellate remedies. Damages have yet to be determined
for all but the 12 sample plaintiffs.
In Penny Newman v. J.B. Stringfellow, et al., which involves a damage claim of
$850 million arising from contamination at the Stringfellow toxic waste site, a
group of 17 of the 3,800 plaintiffs has received a verdict against the State for
a total of $159,000. The other cases, which have not been litigated, are in the
process of settlement. In a separate suit, United States, People of the State of
California v. J.B. Stringfellow Jr. et al., the State has been found liable by
the District Court on the counterclaim. The amount of liability is still being
litigated.
In Mervin Morris v. Franchise Tax Board, and related issue cases, the State is
a defendant in a lawsuit involving the exclusion of small business stock gains
from preference tax and in some cases, also from taxation. The Franchise Tax
Board now estimates a combined total of approximately $250 million is at issue
in all (court and administrative) cases with the small business stock issue. In
June 1993 the first Court of Appeal decision on this issue was entered (in the
Lennane case) in favor of the Franchise Tax Board. In August 1993 the second
Court of Appeal decision on this issue was entered (in the Morris case) in favor
of the Franchise Tax Board. On December 28, 1994, the California Supreme Court
decided against the State in Lennane; it has taken no action on Morris. The
State will be losing at least $80 million as a result of the decision in
Lennane.
In Parr v. State of California, a complaint was filed in federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The federal court held that the issuance of registered
warrants does violate the FLSA. In February 1994, Justice Sandra Day O'Connor
refused to block a U.S. magistrate from ordering California to pay $300 million
in penalties. The federal district court issued an order on February 3, 1995
prohibiting the State from further supporting its good faith defense to
liquidated damages, and referred the matter to the magistrate to conduct further
proceedings regarding the damage, if any, to be awarded. The maximum amount of
damage could be approximately $500 million, but the amount of damages to be
considered by the magistrate is unspecified.
Certain cases have been filed with respect to the State's reduction, pursuant
to the 1994-95 Budget Act, in payments under the Aid to Families with Dependent
Children program. In March 1995, the U.S. Supreme Court upheld a State law
limiting certain benefits under the Aid to Families with Dependent Children
program ("AFDC"). In a separate case decided in February 1995, the U.S. Supreme
Court vacated a lower court injunction on a State law which set lower benefit
levels under AFDC for persons residing in the State for
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less than one year. The Supreme Court concluded that a failure to obtain a
federal waiver already prevented the State from enacting such legislation.
Anticipated savings from such new law had been estimated at $22 million
annually. The outcome of remaining cases and their ultimate impact on the
State's finances cannot be determined at this time.
The State recently lost several tax refund cases concerning the method of
determining gross insurance premiums involving health insurance. The loss to the
State will be approximately $200 million. The State is a defendant in three
lawsuits and numerous administrative proceedings involving the exclusion of
small business stock gains from certain taxes. In the event of an adverse
outcome, the State could be required to refund an estimated $500 million.
Several lawsuits have been filed by Malibu Video Systems in State and Federal
court to challenge the transfer of moneys from special fund accounts within the
State Treasury to the State's General Fund pursuant to the Budget Acts of 1991,
1992 and 1993. Plaintiffs seek to have the transfers reversed and the moneys,
allegedly totaling approximately $800 million, returned to the special funds. In
the consolidated state case, a stipulated judgment has been entered requiring
return of $119 million plus interest to specified special funds over a period of
up to five years beginning in fiscal year 1996-97. The federal cases will be
dismissed.
The State is a respondent/defendant in two consolidated cases (American Lung
Association of California v. Wilson; Americans for Nonsmokers' Rights v. State
of California) challenging the purposes of specific appropriations of funds
totaling approximately $65 million for Fiscal Year 1994-95 and approximately $68
million for Fiscal Year 1995-96 from the Cigarette and Tobacco Products Surtax
Fund created by Proposition 99. The petitioners/plaintiffs argue that the funds
can only be used for health education and tobacco-related disease research
programs. The appropriations primarily fund health care services for low-income
persons. In September 1995, the Superior Court issued preliminary injunctions,
confirming an earlier temporary restraining order, prohibiting the State from
issuing, negotiating or processing warrants from the challenged appropriations.
The State has appealed, and a hearing on the petition for writ of mandate is
anticipated to be scheduled, which the State will contest.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in fiscal year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be constitutional, and to transfer to PERS the 1993-94 and
1994-95 contributions that are unpaid to date. The State defendants have
appealed.
In Jernigan & Burleson v. State, filed in federal district court, the prison
inmate plaintiffs claim they are entitled to minimum wages while working for the
Prison Industry Authority. The inmates claim the State has violated the Fair
Labor Standards Act (the "FLSA"). Plaintiffs are seeking back pay for the period
from August 1990 onward, and liquidated damages, for a total of approximately
$350 million. In June 1995, the district court ruled that the inmates are not
employees under the FLSA. The decision has been appealed to the Ninth Circuit
Court of Appeals, with oral argument scheduled for March 1996.
The State is a defendant in California State Employees Association v. Wilson,
where the petitioners are challenging several budget appropriations in the 1994
and 1995 budget acts. The appropriations mandate the transfer of funds from the
State Highway Account to the General Fund to reimburse the General Fund for debt
service costs on two rail bond measures. The petitioners contend that the
transfers violate the bond acts themselves and are requesting the moneys to be
returned. The loss to the State's General Fund could be up to $227 million.
Recent Legislation. Recently, legislation has been enacted which (1)
increases, in limited instances, the abilities of both county boards of
supervisors and redevelopment agencies to impose new special taxes; (2) repeals
the existing limitations on the amount of notes of the State of California which
may be sold; (3) eliminates certain restrictions on repayment of general
obligations bonds; (4) allows revenue anticipation
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notes to be repaid in a succeeding fiscal year and generally facilitates their
issuance; (5) increases the ability of community redevelopment agencies to issue
revenue bonds for the purpose of refunding bonds of other political subdivisions
of the State; and (6) automatically and proportionately reduces programmed
General Fund appropriations for the next fiscal year (except those mandated by
the Constitution) up to 4%, if the State Director of Finance, with concurrence
of the Commission on State Finance, certifies that revenues for such fiscal year
were not expected to meet programmed budgetary requirements. After 1995, the
maximum personal income tax rate is scheduled to return to 9.3 percent from 11
percent, and the AMT rate is scheduled to drop to 7 percent from 8.5 percent. As
of April 1996, the Assembly was expected to pass a bill that would cut personal
and corporate income taxes by 15 percent over three years. Under the bill,
marginal personal income tax rates would be cut by 5 percent a year beginning in
1997. The corporate tax rate, currently 9.3 percent, would also be cut by 5
percent a year for three years, making it 7.91 percent by 2000. The effect of
the tax cuts on general revenue loss is undetermined. In January 1996,
legislation was introduced in the Assembly that would allow county governments
to shift sales tax revenues currently earmarked for transportation spending for
other uses. Local transportation agencies, cities and some counties oppose the
bill on the grounds that, if approved, the bill would seriously impair the
ability of state transit agencies to issue new debt for upcoming projects. In
1994, when Orange County declared bankruptcy and Los Angeles County was nearly
insolvent, the Legislature approved a one-time diversion of $620 million
transportation funds to the two counties' budgets. On November 8, 1994,
California voters approved initiatives relating "three strikes" criminal
penalties and illegal immigrations. The State Controller's report indicated that
there was no anticipated cash impact in the 1994-95 Fiscal Year for such
initiatives, but suggested that budgetary pressure may materialize next year. In
December 1995, Los Angeles County filed a claim with the State seeking $169
million to cover increased court costs arising from "three strikes"
prosecutions.
Additional legislation has been or may be introduced which would create new
regional agencies with the ability to tax and issue debt, alter the definition
of ownership changes that trigger reassessment of business property under
Article XIIIA, modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively would increase the abilities of
State and local governments to impose new taxes, increase existing taxes
(including sales tax increases to fund earthquake relief), or issue bonds or
other debt instruments. It is not currently possible to predict the extent to
which any such legislation will be enacted. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Nor is it currently
possible to determine the impact of any recently enacted or proposed legislation
on California municipal securities in which the Fund may invest or future
allocations of State revenues to local governments.
INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of the
last trading day of the contract and the price at which the future was
originally written. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. An index future has
similar characteristics to a financial future except that settlement is made
through delivery of cash rather than the underlying securities. An example is
the Long-Term Municipal Bond futures contract traded on the Chicago Board of
Trade. It is based on the Bond Buyer's Municipal Bond Index, which represents an
adjusted average price of the forty most recent long-term municipal issues of
$50 million or more ($75 million in the instance of housing issues) rated A or
better by either Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P"), maturing in no less than nineteen years, having a
first call in no less than seven nor more than sixteen years, and callable at
par.
The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its
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obligations under the foregoing transactions, or cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Fund will comply with such segregation
or cover requirements.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, utilize various
other investment strategies as described below to hedge various market risks
(such as interest rates and broad or specific market movements) or to manage the
effective maturity or duration of the Fund's fixed-income securities. Such
strategies are generally accepted by modern portfolio managers and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the 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
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segregation of Fund assets in special accounts, as described below under "Use of
Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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
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with the terms of that option, the Fund will lose any premium it paid for the
option as well as any anticipated benefit of the transaction. Accordingly, the
Adviser must assess the creditworthiness of each such Counterparty or any
guarantor or credit enhancement of the Counterparty's credit to determine the
likelihood that the terms of the OTC option will be satisfied. The Fund will
engage in OTC option transactions only with United States government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers",
or broker dealers, domestic or foreign banks or other financial institutions
which have received (or the guarantors of the obligation of which have received)
a short-term credit rating of "A-1" from S&P or "P-1" from Moody's or an
equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO"). The staff of the SEC currently takes the position that,
in general, OTC options on securities other than U.S. Government securities
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 15% of its assets in illiquid
securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to 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
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contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
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.
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The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will 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
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segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if the Fund
held a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher than the price
of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, assets equal to any remaining obligation would need to be
segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments shall become due but shall not be paid
by the issuer, except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the payments insured may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the Shares
of the Fund or the market value of municipal securities, or payments of any
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on municipal securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for such
obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instruments of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respects to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums
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respecting municipal securities covered by Original Issue Insurance or Secondary
Market Insurance are paid in advance by the issuer or other party obtaining the
insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
Portfolio Insurance. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds
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<PAGE> 523
from the sale by the Fund of such obligation, as insured, would exceed the
proceeds from the sale of such obligation without insurance. The Permanent
Insurance premium with respect to each such obligation is determined based upon
the insurability of each such obligation as of the date of purchase by the Fund
and will not be increased or decreased for any change in the creditworthiness of
such obligation unless such obligation is in default as to payment of principal
or interest, or both. In such event, the Permanent Insurance premium shall be
subject to an increase predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
It is anticipated that certain of the municipal securities to be purchased by
the Fund will be insured under policies obtained by persons other than the Fund.
In instances in which the Fund purchases municipal securities insured under
policies obtained by persons other than the Fund, the Fund does not pay the
premiums for such policies; rather the cost of such policies may be reflected in
a higher purchase price for such municipal securities. Accordingly, the yield on
such municipal securities may be lower than that on similar uninsured municipal
securities. Premiums for a Portfolio Insurance Policy generally are paid by the
Fund monthly, and are adjusted for purchases and sales of municipal securities
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered municipal securities held by
the Fund. In the event the Fund were to purchase Secondary Market Insurance with
respect to any municipal securities then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
or if the Adviser anticipates such a lowering or otherwise does not believe an
insurer's claims-paying ability merits its existing triple-A rating, the Fund
could seek to obtain additional insurance from an insurer whose claims-paying
ability is rated AAA by S&P, or if the Adviser determines that the cost of
obtaining such additional insurance outweigh the benefits, the Fund may elect
not to obtain additional insurance. In making such determination, the Adviser
will consider the cost of the additional insurance, the new claims-paying
ability rating and financial condition of the existing insurer and the
creditworthiness of the issuer and/or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. In that regard, it should be noted
that the claims-paying abilities and debt ratings of several large insurers (at
least one of which insured municipal securities) recently have been lowered by
one or more of the nationally recognized securities rating agencies and that
many insurers currently are experiencing adverse results in their investment
portfolios. In addition, certain insurers' operations recently have been assumed
by their state regulatory agencies. The Fund cannot predict the consequences of
a state takeover of an insurer's obligations and, in particular, whether such an
insurer (or its state regulatory agency) could or would honour all of the
insurer's contractual obligations including any outstanding insurance contracts
insuring the timely payment of principal and interest on
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<PAGE> 524
municipal securities. The Fund cannot predict the impact which such events might
have on the market values of such municipal security. In the event of a default
by an insurer on its obligations with respect to any municipal securities in the
Fund's portfolio, the Fund would look to the issuer and/or guarantor of the
relevant municipal securities for payments of principal and interest and such
issuer and/or guarantor may not be rated AAA by S&P. Accordingly, the Fund could
be exposed to greater risk of non-payment in such circumstances which could
adversely affect the Fund's net asset value and the market price per Common
Share. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Common Shares.
AMBAC Indemnity Corporation. AMBAC Indemnity is a Wisconsin-domiciled stock
insurance corporation regulated by the Insurance Department of the State of
Wisconsin and licensed to do business in 50 states and the District of Columbia.
On December 31, 1991, AMBAC Indemnity had admitted assets of approximately
$1,431,000,000, total liabilities of approximately $684,400,000 and statutory
capital of approximately $830,000,000. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory contingency reserve. AMBAC
Indemnity was formerly a wholly-owned subsidiary of Citicorp Financial Guaranty
Holdings, Inc. ("Holdings") (formerly known as AMBAC Inc.), a financial holding
company and itself a wholly-owned subsidiary of Citibank, N.A. ("Citibank").
According to Best Insurance Report (1991 edition), AMBAC Indemnity's aggregate
exposure under all Class I (municipal bond insurance) financial guaranty bonds,
the only class set forth therein, in force as of December 31, 1990 was
$86,200,000,000.
On May 1, 1991, AMBAC Inc. ("AMBAC Inc."), a financial holding company formed
by Holdings, registered for sale with the Securities and Exchange Commission
17,600,000 shares of its common stock. The registration statement with respect
to such sale was declared effective on July 11, 1991. As a result of the sale,
Citibank, through its affiliate Holdings, owns approximately 49% of the total
equity of AMBAC Inc., with a right to cast 20% of the total number of votes of
all shares of outstanding common stock of AMBAC Inc. until such time as
Citibank, including its affiliates, reduces its equity ownership to less than
25% of AMBAC Inc. (at which time the shares owned by it become non-voting). As
of the date of the consummation of the sale of common stock, AMBAC Indemnity
became a direct wholly owned subsidiary of AMBAC Inc. The Wisconsin Insurance
Department has stated that the sale of common stock described herein does not
require its prior approval. Both Moody's and S&P have reaffirmed that the sale
of the common stock of AMBAC Inc. does not affect AMBAC Indemnity's triple-A
claims-paying ability ratings.
AMBAC Indemnity has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC Indemnity has been and will be assumed by a number
of foreign and domestic unaffiliated reinsurers.
Copies of AMBAC Indemnity's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC Indemnity. The address
of AMBAC Indemnity's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
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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 any audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
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.
</TABLE>
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<PAGE> 526
<TABLE>
<S> <C>
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgement with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
B-24
<PAGE> 527
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it will be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest-quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
B-25
<PAGE> 528
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by rating in parentheses. These are bonds secured by: (a)
earnings of projects under construction, (b) earnings of projects unseasoned in
operation experience, (c) rentals that begin when facilities are completed, or
(d) payments to which some other limiting condition attaches the parenthetical
rating denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition.
</TABLE>
B-26
<PAGE> 529
<TABLE>
<S> <C>
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
B-27
<PAGE> 530
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.
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.
</TABLE>
B-28
<PAGE> 531
<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
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-29
<PAGE> 532
<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-30
<PAGE> 533
<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-31
<PAGE> 534
<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 and 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-32
<PAGE> 535
<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-33
<PAGE> 536
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-34
<PAGE> 537
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.
B-35
<PAGE> 538
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>
Prudential Securities FBO................................ 5,955 C 5.57%
Kyra P. Wayne TTEE
Kyra P. Wayne Separate Property
Trust Agreement UA DTD 07/26/91
Monterey, CA 93940
Emmett D. Bogart &....................................... 5,962 C 5.58%
Josie L. Bogart Co. TTEES
Bogart Family Trust
U/A DTD May 11, 1989
9154 Bedel Court
San Diego, CA 92129-3347
NFSC FEBO #OBP-242519.................................... 5,985 C 5.60%
Tyler Tanaka TR
U/A 8/2/91
The Tokuko Tanaka Trust
10265 Rue Chamberry
San Diego, CA 92131-2239
Edward D. Jones and Co. F/A/O............................ 6,033 C 5.64%
Dorothy C. Sousa TTEE
U/A DTD 07/31/91 FOR
EDJ #531-01998-1-4
P.O. Box 2500
Maryland Heights, MO 63043-8500
Edward D. Jones and Co. F/A/O............................ 6,084 C 5.69%
Juanita Kvilhaug TTEE
U/A DTD 03/23/89 For The
EDJ #531-02068-1-7
P.O. Box 2500
Maryland Heights, MO 63043-8500
Timothy J. Conlon & Mary Beth Conlon..................... 6,343 C 5.93%
TTEE Timothy J. Conlon & Mary Beth
Conlon Revoc Trust's U/A DTD
12/10/93
272 Donald Drive
Moraga, CA 94556-2310
Prudential Securities FBO................................ 6,597 C 6.17%
Fred L. Stern & Rose Stern JT TEN
1236 Cave St. #3B
LaJolla, CA 92037-3631
Dennis W. Zaiko.......................................... 8,940 C 8.36%
G. Linda Ruiz-Zaiko Co. Tr
U/A 6/10/93 Zaiko Family Trust
4 Ashford Court
Alamo, CA 94507-2406
NFSC FEBO #0BP-238511.................................... 9,248 C 8.65%
Eugene C. & Joan A. Ostrander TT
Eugene C. and Joan A. Ostrander Fam. Tr. U/A 3/1/91
4440 Cerritos Avenue
Long Beach, CA 90807-2454
</TABLE>
B-36
<PAGE> 539
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 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 between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement will continue in effect from year to year if
specifically approved by the Trustees of the Trust, of which the Fund is a
separate series, (or the Fund's shareholders) and by the disinterested Trustees
in compliance with the requirements of the 1940 Act. The agreement may be
terminated without penalty upon 60 days written notice by either party and will
automatically terminate in the event of assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any State in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any State would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid advisory
expenses of $538,373, $297,611 and $196,020, respectively.
OTHER AGREEMENTS.
FUND ACCOUNTING AGREEMENT. The Fund has entered into an accounting services
agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such
B-37
<PAGE> 540
services are expected to enable the Fund to more closely monitor and maintain
its accounts and records. The Fund shares with the other Van Kampen American
Capital mutual funds advised by the VK Adviser and distributed by the
Distributor, in the cost of providing such services, with 25% of such costs
shared proportionately based on the number of outstanding classes of shares per
fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $11,010, $6,600 and $4,467, respectively, representing the
Adviser's cost of providing accounting services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent the Fund's change in
transfer agent, the Fund received support services for shareholders, including
the handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Payment by the Fund for
such services is made on cost basis for the employment of the personnel and the
equipment necessary to render the support services. At such time, the Fund, and
the other Van Kampen American Capital mutual funds distributed by the
Distributor, shared such costs proportionately among themselves based upon their
respective net asset values.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $31,090, $77,000 and $49,025, respectively, representing the
Distributor's cost of providing certain support services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the fund's minute books and records, preparation and oversight of
the fund's regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the years ended December 31, 1995, 1994 and 1993, the Fund paid expenses
of approximately $11,400, $12,100 and $8,900, respectively, representing Van
Kampen American Capital, Inc.'s cost of providing legal services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firms' professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the investment
adviser. Since
B-38
<PAGE> 541
statistical and other research information is only supplementary to the research
efforts of the Adviser and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information to the Fund
and the Adviser, (ii) have sold or are selling shares of the Fund and (iii) may
select firms that are affiliated with the Fund, its investment adviser or its
distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commission paid to the Distributor and other affiliates of the
Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
STRATEGIC INSIGHT. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
more than 80 analysts devoted to various specializations.
Shares of the Fund are offered on a continuous basis through Van Kampen
American Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, IL
60181. Van Kampen American Capital Distributors, Inc. is a
B-39
<PAGE> 542
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
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein collectively as the Plans. The Plans provide that the
Fund may spend a portion of the Fund's average daily net assets attributable to
each class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor 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 $364,673, $201,044 and $25,540 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $330,152, $49,927 and $18,905
represent payments to financial intermediaries under the Selling Agreements for
Class A
B-40
<PAGE> 543
Shares, Class B Shares and Class C Shares, respectively. For the year ended
December 31, 1995, the Fund has reimbursed the Distributor $30,850 and $2,748
for advertising expenses, and $9,069 and $1,988 for compensation of the
Distributor sales personnel for the Class A Shares and Class B Shares,
respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
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.
CLASS A SHARES
The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1995 was 14.44%; (ii) the five year period ended December 31, 1995 was 7.70%;
(iii) the ten year period ended December 31, 1995 was 8.17%; and (iv) the
approximately ten year, one month period from December 13, 1985 (the
commencement of investment operations of the Fund) through December 31, 1995 was
8.23%.
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 4.12%. The tax-equivalent yield 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 43% tax
rate) was 7.23%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.84%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 121.95%.
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 129.41%.
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 14.33%
and (ii) the approximately one year, eight month period of May 1, 1993
(commencement of distribution) through December 31, 1995 was 4.35%.
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 3.49%. The tax-equivalent yield 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 43% tax
rate) was 6.12%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.29%.
B-41
<PAGE> 544
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 12.02%.
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 14.02%.
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to the
Class C Shares for the (i) one year period ending December 31, 1995 was 16.40%
and (ii) the approximately two year, five month period from August 13, 1993
(commencement of distribution) through December 31, 1995 was 3.92%.
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 3.49%. The tax-equivalent yield 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 43% tax
rate) was 6.12%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1995 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.29%.
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 9.74%.
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 9.74%.
B-42
<PAGE> 545
Independent Auditors' Report
- -------------------------------------------------------------------------------
The Board of Trustees and Shareholders of the
Van Kampen American Capital California Insured Tax Free Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital California Insured Tax Free 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 California Insured Tax Free 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-43
<PAGE> 546
(TABLE)
(CAPTION)
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------
(S) (C) (C) (C) (C)
<S> <C> <C> <C> <C>
California Municipal Bonds 100.4%
$ 1,000 Alameda, CA Ctfs Partn Alameda Swr Impt Fin Corp(Prerefunded @
03/01/98) (AMBAC Insd)............................................ 7.400% 03/01/18 $ 1,092,770
4,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (MBIA Insd)................ 6.450 12/28/18 4,411,280
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool
Ser A2 (Cap Guar Insd)............................................ 6.400 12/15/14 3,280,620
750 Berkeley, CA Ctfs Partn Cap Imp Berkeley Civic Impt (AMBAC
Insd)............................................................. 7.500 06/01/19 819,878
1,000 Brea & Olinda, CA Unified Sch Dist Ctfs Partn Sr High
Sch Pgm Ser A Rfdg (Cap Guar Insd)................................ 6.000 08/01/09 1,057,990
1,300 California Edl Fac Auth Rev Univ San Diego Proj
Stanford Univ Ser I (MBIA Insd)................................... 6.750 10/01/15 1,426,971
2,000 California Hlth Fac Fin Auth Rev Adventist Hlth Ser A
Rfdg (MBIA Insd) (F3)............................................. 6.500 03/01/14 2,153,220
2,650 California Hlth Fac Fin Auth Rev Kaiser Permanente Ser A (AMBAC
Insd)............................................................. 5.550 08/15/25 2,636,458
2,000 California Hlth Fac Fin Auth Rev Kaiser Permanente Ser A
(FSA Insd)........................................................ 5.550 08/15/25 2,001,300
15 California Hsg Fin Agy Rev Hsg Ser B (MBIA Insd).................. 8.625 08/01/15 15,999
1,200 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B
(MBIA Insd) (F3).................................................. 8.100 03/01/18 1,298,532
1,500 California St (FGIC Insd)......................................... 6.250 09/01/12 1,691,115
1,500 California St (FSA Insd).......................................... 5.150 10/01/19 1,452,930
3,650 California St Pub Wks Brd Lease Rev Dept of Corrections
CA St Prison Coalinga Ser B (MBIA Insd)........................... 5.375 12/01/19 3,649,817
3,170 California St Pub Wks Brd Lease Rev Dept of Corrections
CA St Prison Susanville Ser D (Cap Guar Insd)..................... 5.250 06/01/15 3,194,884
1,000 California St Pub Wks Brd Lease Rev Ser A (AMBAC Insd)............ 5.750 09/01/21 1,011,710
1,000 California St Univ Fresno Assn Inc Rev Auxiliary Residence
Student Proj (MBIA Insd).......................................... 6.250 02/01/17 1,072,230
1,000 California St Var Purp (MBIA Insd)................................ 6.000 10/01/10 1,100,760
5,000 California St Var Purp (MBIA Insd)................................ 6.000 10/01/14 5,240,400
1,000 California St Var Purp (FSA Insd)................................. 5.500 04/01/19 999,260
5,620 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Good Samaritan Hlth Sys (Cap Mac Insd)............................ 6.250 05/01/14 6,028,743
2,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt Proj
Ser A Rfdg (MBIA Insd)............................................ 7.000 08/01/12 2,415,520
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA Insd)........................ 6.200 09/01/18 1,177,035
2,350 Chino, CA Unified Sch Dist Ctfs Partn Master Lease Pgm
(FSA Insd)........................................................ 6.250 03/01/09 2,578,772
1,500 Chino, CA Unified Sch Dist Ctfs Partn Master Lease Pgm
(FSA Insd)........................................................ 6.000 03/01/14 1,561,860
1,200 Colton, CA Jt Unified Sch Dist Cmnty Fac Dist Spl Tax Southridge
Vlg Rfdg (Cap Guar Insd).......................................... 5.900 09/01/14 1,200,156
1,500 Compton, CA Cmnty Redev Agy Tax Alloc Walnut Indl Park
Ser A Rfdg (Prerefunded @ 08/01/99) (AMBAC Insd).................. 7.500 08/01/13 1,700,385
(/TABLE)
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 547
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 20 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
Ser 3 (BIGI Insd)............................................... 8.000% 07/01/18 $ 22,148
1,000 Contra Costa Cnty, CA Ctfs Partn Contra Costa Cnty Pub
Fac Co (BIGI Insd) (F3)......................................... 7.800 06/01/06 1,123,600
500 Contra Costa Cnty, CA Ctfs Partn Contra Costa Cnty Pub
Fac Co (BIGI Insd).............................................. 7.800 06/01/07 561,800
1,000 Contra Costa Cnty, CA Santn Dist No 7A Ctfs Partn Sub-Delta
Diablo Fin Corp (Prerefunded @ 12/01/98) (MBIA Insd)............ 7.600 12/01/08 1,119,370
3,820 Contra Costa, CA Sch Fin Auth Rev Vista Unified Sch
Dist Sch Sites Ser A (Prerefunded @ 09/01/02) (FSA Insd)........ * 09/01/17 1,034,265
1,550 Contra Costa, CA Wtr Auth Wtr Treatment Rev Ser A Rfdg
(FGIC Insd)..................................................... 5.750 10/01/14 1,602,049
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj Area A Ser A Rfdg
(FGIC Insd)..................................................... 6.250 09/01/13 5,593,437
2,000 Fairfield Suisun, CA Swr Dist Swr Rev Ser A Rfdg (MBIA Insd).... 6.250 05/01/16 2,112,240
1,000 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)................... 6.000 10/01/12 1,046,650
1,400 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd)................... 6.000 10/01/19 1,462,328
2,000 Fresno Cnty, CA Fin Auth Solid Waste Rev American
Avenue Landfill Proj (MBIA Insd)................................ 5.750 05/15/14 2,063,080
1,745 Gilroy, CA Unified Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)........................................... 5.875 09/01/06 1,898,612
1,810 Gilroy, CA Unified Sch Dist Ctfs Partn Measure J Cap
Projs Rfdg (FSA Insd)........................................... 6.250 09/01/12 1,961,678
20,000 Grossmont, CA Union High Sch Dist Ctfs Partn
(MBIA Insd)..................................................... * 11/15/21 3,748,200
1,750 Irwindale, CA Cmnty Redev Agy Tax Alloc Indl Dev Proj
Rfdg (AMBAC Insd)............................................... 7.000 08/01/15 1,835,645
1,835 Local Govt Fin Auth CA Rev Cap Apprec San Francisco Redev (MBIA
Insd)........................................................... * 08/01/08 920,895
2,000 Local Govt Fin Jt Pwrs Auth CA Rev Anaheim Redev Agy Ser A
(Prerefunded @ 09/01/98) (MBIA Insd) (F3)....................... 7.950 09/01/09 2,240,120
1,850 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent Proj B Rfdg
(AMBAC Insd).................................................... 7.000 12/01/15 2,052,297
2,500 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent Rfdg (MBIA
Insd)........................................................... 5.375 12/01/22 2,478,800
1,000 Long Beach, CA Redev Agy Downtown Redev Proj Ser A (Prerefunded
@ 11/01/98) (AMBAC Insd)........................................ 7.750 11/01/10 1,120,650
100 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive View Med Ser A
(Prerefunded @ 04/01/99) (AMBAC Insd)........................... 9.100 04/01/01 117,187
85 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive View Med Ser A
(Prerefunded @ 04/01/99) (AMBAC Insd)........................... 9.200 04/01/02 99,852
824 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR Lease Ltd (FSA
Insd)........................................................... 7.375 12/15/06 942,079
1,295 Los Angeles, CA Dept Wtr & Pwr Elec Plant Rev
(FGIC Insd)..................................................... 5.875 01/15/07 1,383,889
6,000 Los Angeles, CA Unified Sch Dist Ctfs Partn Multi Ppty Proj
Rfdg(FSA Insd).................................................. 5.625 11/01/13 6,000,000
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 548
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 1,200 Los Angeles, CA Wastewtr Sys Rev (Prerefunded @ 08/01/98) (MBIA
Insd) (F3).......................................................... 7.700% 08/01/18 $ 1,333,224
500 M-S-R Pub Pwr Agy CA San Juan Proj Rev Ser E (MBIA Insd)............ 6.000 07/01/22 515,200
1,300 Martinez, CA Ctfs Partn Martinez Pub Impt Corp
(Prerefunded @ 12/01/98) (AMBAC Insd)............................... 7.700 12/01/18 1,470,352
750 Mesa, CA Cons Wtr Dist Ctfs Partn Mesa Cons Wtr Impt
Co Cap Impt (AMBAC Insd)............................................ 7.625 03/15/08 823,185
4,075 New Haven, CA Unified Sch Dist Ser D (FGIC Insd).................... * 08/01/16 1,247,480
4,355 New Haven, CA Unified Sch Dist Ser D (FGIC Insd).................... * 08/01/17 1,254,371
1,250 North City West, CA Sch Fac Fin Auth Spl Tax Ser B
Rfdg (Cap Guar Insd)................................................ 5.750 09/01/15 1,287,925
1,640 North City West, CA Sch Fac Fin Auth Spl Tax Ser B Rfdg
(Cap Guar Insd)..................................................... 6.000 09/01/19 1,736,268
500 Northern CA Pwr Agy Pub Pwr Rev Combustion Turbine
Proj 1 Ser A Rfdg (MBIA Insd)....................................... 6.000 08/15/10 517,960
400 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj 1
Ser A Rfdg (Prerefunded @ 07/01/21) (AMBAC Insd).................... 7.500 07/01/23 507,764
2,760 Oakland, CA Unified Sch Dist Alameda Cnty Cap Apprec Ser A (FGIC
Insd)............................................................... * 08/01/13 1,013,527
3,475 Oakland, CA Unified Sch Dist Alameda Cnty Cap Apprec Ser A (FGIC
Insd)............................................................... * 08/01/14 1,192,828
750 Oceanside, CA Ctfs Partn Corp Yd Proj Fin (Prerefunded
@ 08/01/02) (AMBAC Insd)............................................ 7.300 08/01/21 890,160
1,000 Orange Cnty, CA Recovery Ser A Rfdg (MBIA Insd)..................... 5.750 06/01/15 1,028,210
3,000 Palm Desert, CA Fin Auth Tax Alloc Rev (Inverse Fltg) (MBIA Insd)... 8.330 04/01/22 3,408,750
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg (FSA Insd)...................... 6.100 03/01/16 1,057,760
1,945 Pittsburg, CA Unified Sch Dist Ctfs Partn (AMBAC Insd).............. 6.300 09/01/15 2,091,303
2,065 Pomona, CA Pub Fin Auth Rev Ser Q (MBIA Insd) (F2).................. 5.900 12/01/25 2,100,270
1,360 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg (MBIA Insd)........... 6.000 04/01/19 1,500,801
1,000 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho Redev Proj (MBIA
Insd)............................................................... 7.125 09/01/19 1,109,340
1,235 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho Redev Proj (MBIA
Insd)............................................................... 6.750 09/01/20 1,339,987
1,265 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho Redev Proj
(Prerefunded @ 09/01/99) (MBIA Insd)................................ 6.750 09/01/20 1,404,960
1,000 Redding, CA Elec Sys Rev Ctfs Partn (Inverse Fltg) (MBIA Insd)...... 8.295 07/08/22 1,295,000
2,495 Rio Linda, CA Univ Sch Dist Ser A (AMBAC Insd)...................... 6.250 08/01/15 2,654,056
2,000 Rohnert Park, CA Hsg Fin Auth Rev Rancho Feliz Mobile Home Park
(FSA Insd).......................................................... 5.600 12/01/15 2,015,480
2,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg
(MBIA Insd)......................................................... 5.750 08/15/13 2,054,660
2,500 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap) (MBIA
Insd)............................................................... 5.500 07/01/16 2,529,775
1,000 San Diego, CA Indl Dev Rev San Diego Gas & Elec Ser A
(MBIA Insd)......................................................... 6.400 09/01/18 1,075,450
1,000 San Gabriel, CA Unified Sch Dist Ctfs Partn (FSA Insd).............. 6.000 09/01/15 1,050,920
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 549
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 5,750 San Jose, CA Fin Auth Rev Convention Proj Ser C (Cap Guar
Insd)............................................................ 6.375% 09/01/13 $ 6,162,160
2,000 San Mateo Cnty, CA Jt Pwrs Fin Auth Lease Rev San Mateo Cnty
Hlth Care Cent Ser A (FSA Insd).................................. 6.000 07/15/09 2,133,580
1,000 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement Proj
Ser A (AMBAC Insd)............................................... 6.875 11/15/14 1,147,880
1,990 South Cnty, CA Regl Wastewtr Auth Rev Regl Wastewtr Fac Proj Ser
A (FGIC Insd).................................................... 6.000 08/01/14 2,084,306
3,735 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev Sr Lien Ser A
Rfdg (MBIA Insd)................................................. 7.000 09/01/08 4,423,809
3,000 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev Sr Lien Ser A
Rfdg (MBIA Insd)................................................. 7.000 09/01/09 3,567,420
2,590 Stanislaus Cnty, CA Ctfs Partn Cap Impt Pgm Ser A Rfdg
(MBIA Insd) (F2)................................................. 5.000 05/01/09 2,551,435
2,720 Stanislaus Cnty, CA Ctfs Partn Cap Impt Pgm Ser A Rfdg
(MBIA Insd) (F2)................................................. 5.000 05/01/10 2,663,968
1,050 Stockton, CA Rev Ctfs Partn Wastewtr Treatment Plant Expansion
Ser A (FGIC Insd)................................................ 6.400 09/01/07 1,171,926
1,015 Stockton, CA Rev Ctfs Partn Wastewtr Treatment Plant Expansion
Ser A (FGIC Insd)................................................ 6.500 09/01/08 1,132,314
2,000 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd)......... 6.750 01/01/12 2,087,960
3,000 University of CA Rev Multi Purp Proj Ser D (MBIA Insd)........... 6.300 09/01/14 3,225,510
-------------
Total Long-Term Investments 100.4%
(Cost $160,321,399) (F1).................................................................... 174,670,700
Short-Term Investments at Amortized Cost 2.4%................................................. 4,200,000
Liabilities in Excess of Other Assets (2.8%).................................................. (4,863,378)
-------------
Net Assets 100%............................................................................... $174,007,322
-------------
</TABLE>
* Zero coupon bond
(FN)
(F1) At December 31, 1995, cost for federal income tax purposes is
$160,321,399; the aggregate gross unrealized appreciation is $14,349,301
and the aggregate gross unrealized depreciation is $0, resulting in net
unrealized appreciation of $14,349,301.
(F2) Securities purchased on a when issued or delayed delivery basis.
(F3) Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
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.
<TABLE>
Portfolio Composition by Credit Quality
<S> <C>
AAA.......................... 100%
--------
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 550
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $160,321,399) (Note 1)........................... $ 174,670,700
Short-Term Investments (Note 1)..................................................... 4,200,000
Cash................................................................................ 85,328
Receivables:
Interest.......................................................................... 2,486,652
Fund Shares Sold.................................................................. 599,756
Other............................................................................... 6,403
---------------
Total Assets................................................................... 182,048,839
---------------
Liabilities:
Payables:
Investments Purchased............................................................. 7,142,923
Income Distributions.............................................................. 281,268
Investment Advisory Fee (Note 2).................................................. 218,351
Fund Shares Repurchased........................................................... 51,529
Accrued Expenses.................................................................... 347,446
---------------
Total Liabilities.............................................................. 8,041,517
---------------
Net Assets.......................................................................... $ 174,007,322
===============
Net Assets Consist of:
Capital (Note 3).................................................................... $ 167,003,524
Net Unrealized Appreciation on Investments.......................................... 14,349,301
Accumulated Net Realized Loss on Investments........................................ (7,345,503)
---------------
Net Assets.......................................................................... $ 174,007,322
===============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$147,556,165 and 8,319,584 shares of capital stock issued and outstanding)
(Note 3)....................................................................... $ 17.74
Maximum sales charge (3.25%* of offering price)................................ .60
---------------
Maximum offering price to public............................................... $ 18.34
===============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$24,613,802 and 1,387,788 shares of capital stock issued and outstanding)
(Note 3)....................................................................... $ 17.74
===============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,837,355
and 103,597 shares of capital stock issued and outstanding) (Note 3)........... $ 17.74
===============
*On sales of $25,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 551
Statement of Operations
For the Year Ended December 31, 1995
<TABLE>
- ----------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest........................................................................... $ 9,958,924
---------------
Expenses:
Investment Advisory Fee (Note 2)................................................... 783,620
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$364,673,$201,044 and $25,540, respectively) (Note 6)............................ 591,257
Shareholder Services (Note 2)...................................................... 173,439
Custody............................................................................ 99,509
Trustees Fees and Expenses (Note 2)................................................ 41,429
Legal (Note 2)..................................................................... 22,858
Insurance (Note 1)................................................................. 741
Other.............................................................................. 155,787
---------------
Total Expenses................................................................ 1,868,640
Less Fees Waived and Expenses Reimbursed ($245,247 and $13,125,
respectively)............................................................... 258,372
---------------
Net Expenses.................................................................. 1,610,268
---------------
Net Investment Income.............................................................. $ 8,348,656
===============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................. $ 68,415,612
Cost of Securities Sold.......................................................... (68,394,721)
---------------
Net Realized Gain on Investments (Including realized gain on futures
transactions of $269,845)........................................................ 20,891
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................... (4,102,506)
End of the Period................................................................ 14,349,301
---------------
Net Unrealized Appreciation on Investments During the Period....................... 18,451,807
---------------
Net Realized and Unrealized Gain on Investments.................................... $ 18,472,698
===============
Net Increase in Net Assets from Operations......................................... $ 26,821,354
===============
</TABLE>
See Notes to Financial Statements
B-49
<PAGE> 552
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........................................... $ 8,348,656 $ 8,832,987
Net Realized Gain/Loss on Investments........................... 20,891 (5,830,138)
Net Unrealized Appreciation/Depreciation on
Investments During the Period................................. 18,451,807 (18,824,986)
----------------- -----------------
Change in Net Assets from Operations............................ 26,821,354 (15,822,137)
----------------- -----------------
Distributions from Net Investment Income:
Class A Shares................................................ (7,355,019) (7,808,441)
Class B Shares................................................ (897,526) (811,323)
Class C Shares................................................ (115,024) (194,310)
----------------- -----------------
Total Distributions............................................. (8,367,569) (8,814,074)
----------------- -----------------
Net Change in Net Assets from Investment Activities............. 18,453,785 (24,636,211)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold....................................... 24,793,274 31,539,463
Net Asset Value of Shares Issued Through Dividend
Reinvestment.................................................. 4,996,930 5,318,194
Cost of Shares Repurchased...................................... (24,371,464) (32,496,252)
----------------- -----------------
Net Change in Net Assets from Capital Transactions.............. 5,418,740 4,361,405
----------------- -----------------
Total Increase/Decrease in Net Assets........................... 23,872,525 (20,274,806)
Net Assets:
Beginning of the Period......................................... 150,134,797 170,409,603
----------------- -----------------
End of the Period (Including undistributed net investment
income of $0 and $18,913, respectively)....................... $ 174,007,322 $ 150,134,797
================= =================
</TABLE>
See Notes to Financial Statements
B-50
<PAGE> 553
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............ $ 15.802 $ 18.286 $ 16.858 $ 16.259 $ 15.730
---------- ----------- ---------- ---------- ----------
Net Investment Income................ .884 .912 .967 1.004 .990
Net Realized and Unrealized
Gain/Loss on Investments........... 1.938 (2.484) 1.441 .585 .529
---------- ----------- ---------- ---------- ----------
Total from Investment Operations..... 2.822 (1.572) 2.408 1.589 1.519
Less Distributions from and in
Excess of Net Investment Income.... .888 .912 .980 .990 .990
---------- ----------- ---------- ---------- ----------
Net Asset Value, End of the Period... $ 17.736 $ 15.802 $ 18.286 $ 16.858 $ 16.259
========== =========== ========== ========== ==========
Total Return*........................ 18.28% (8.75%) 14.54% 10.08% 9.98%
Net Assets at End of the Period
(In millions)...................... $ 147.6 $ 130.3 $ 151.1 $ 74.2 $ 60.2
Ratio of Expenses to Average
Net Assets* (Annualized)........... .89% .78% .69% .69% .55%
Ratio of Net Investment Income
to Average Net Assets*
(Annualized)....................... 5.23% 5.46% 5.37% 6.07% 6.20%
Portfolio Turnover................... 42.40% 56.38% 36.17% 60.70% 69.85%
</TABLE>
* If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (Annualized)............. 1.05% 1.08% 1.01% 1.08% 1.04%
Ratio of Net Investment Income to
Average Net Assets (Annualized)..... 5.07% 5.16% 5.05% 5.68% 5.71%
</TABLE>
See Notes to Financial Statements
B-51
<PAGE> 554
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
From May 1, 1993
(Commencement of
Year Ended Year Ended Distribution) to
Class B Shares December 31, 1995 December 31, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value,
Beginning of the Period......... $ 15.805 $ 18.266 $ 17.570
------- ------- ------
Net Investment Income............. .766 .785 .549
Net Realized and Unrealized
Gain/Loss on Investments........ 1.926 (2.482) .705
------- ------- ------
Total from Investment
Operations**.................... 2.692 (1.697) 1.254
Less Distributions from and in
Excess of Net Investment
Income.......................... .761 .764 .558
------- ------- ------
Net Asset Value,
End of the Period............... $ 17.736 $ 15.805 $ 18.266
------- ------- ------
Total Return*..................... 17.33% (9.39%) 7.25%**
Net Assets at End of the Period
(In millions)................... $ 24.6 $ 17.1 $ 15.3
Ratio of Expenses to Average
Net Assets* (Annualized)........ 1.61% 1.52% 1.45%
Ratio of Net Investment Income
to Average Net Assets*
(Annualized).................... 4.51% 4.71% 4.06%
Portfolio Turnover................ 42.40% 56.38% 36.17%
* 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 (Annualized)......... 1.77% 1.82% 1.77%
Ratio of Net Investment Income
to Average Net Assets
(Annualized).................... 4.35% 4.41% 3.74%
** Non-annualized
</TABLE>
See Notes to Financial Statements
B-52
<PAGE> 555
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
From 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> <C> <C> <C>
Net Asset Value,
Beginning of the Period......... $ 15.798 $ 18.257 $ 18.010
----------------- ----------------- --------------------
Net Investment Income............. .758 .773 .307
Net Realized and Unrealized
Gain/Loss on Investments........ 1.941 (2.468) .258
----------------- ----------------- --------------------
Total from Investment
Operations**.................... 2.699 (1.695) .565
Less Distributions from and in
Excess of Net Investment
Income.......................... .761 .764 .318
----------------- ----------------- --------------------
Net Asset Value,
End of the Period............... $ 17.736 $ 15.798 $ 18.257
----------------- ----------------- --------------------
Total Return*..................... 17.40% (9.40%) 3.17%**
Net Assets at End of the Period
(In millions)................... $ 1.8 $ 2.8 $ 4.0
Ratio of Expenses to Average
Net Assets* (Annualized)........ 1.60% 1.51% 1.45%
Ratio of Net Investment Income
to Average Net Assets*
(Annualized).................... 4.50% 4.71% 3.82%
Portfolio Turnover................ 42.40% 56.38% 36.17%
</TABLE>
*If certain expenses had not been assumed by VKAC, total return would have been
lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C>
Ratio of Expenses to Average
Net Assets (Annualized)........ 1.75% 1.82% 1.76%
Ratio of Net Investment Income
to Average Net Assets
(Annualized)................... 4.34% 4.39% 3.52%
** Non-annualized
</TABLE>
See Notes to Financial Statements
B-53
<PAGE> 556
Notes to Financial Statements
December 31, 1995
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital California Insured Tax Free 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 California investors with a high
level of current income exempt from federal and California income taxes, with
liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured California municipal securities. The Fund
commenced investment operations on December 13, 1985. The distribution of the
Fund's Class B shares and Class C shares commenced on May 1, 1993, and August
13, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation--Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.
B. Security Transactions--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" 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 Expense--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.
B-54
<PAGE> 557
Notes to Financial Statements (Continued)
December 31, 1995
- -------------------------------------------------------------------------------
D. Federal Income Taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income, if any, to
its shareholders. Therefore, no provision for federal income taxes is
required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1995, the Fund had an accumulated capital loss carry
forward for tax purposes of $7,345,503. Of this amount, $1,014,876, $105,997,
$5,623,922 and $600,708 will expire on December 31, 1996, 2001, 2002 and 2003,
respectively. Net realized gains or losses may differ for financial and tax
reporting purposes primarily as a result of post October 31 losses which are
not recognized for tax purposes until the first day of the following fiscal
year. On December 31, 1995, $100,459 of the Fund's capital loss carryforward
expired, resulting in a permanent book and tax basis difference. Accordingly,
this difference was reclassified from accumulated net realized loss on
investments to Class A share capital.
E. Distribution of Income and Gains--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
F. Insurance Expense--The Fund typically invests in insured bonds. Any
portfolio securities not specifically covered by a primary insurance policy are
insured secondarily through the Fund's portfolio insurance policy. Insurance
premiums are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance
policy guarantees the timely payment of principal and interest on the
securities in the Fund's portfolio.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ---------------------------------------------------------------------------------
<S> <C>
First $100 million.................................................. .500 of 1%
Next $150 million................................................... .450 of 1%
Next $250 million................................................... .425 of 1%
Over $500 million................................................... .400 of 1%
</TABLE>
B-55
<PAGE> 558
Notes to Financial Statements (Continued)
December 31, 1995
- -----------------------------------------------------------------------------
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 $53,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") 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 $68,000,
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 $46,000.
At December 31, 1995, VKAC owned 100 shares each of Classes B and C.
3. Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B and C
each with a par value of $.01 per share. There are an unlimited number of
shares of each class authorized.
B-56
<PAGE> 559
Notes to Financial Statements (Continued)
December 31, 1995
- ----------------------------------------------------------------------------
At December 31, 1995, capital aggregated $139,971,316, $24,804,730 and
$2,227,478 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..................... 986,569 $ 16,771,568
Class B..................... 434,181 7,401,889
Class C..................... 36,228 619,817
----------- -------------
Total Sales................... 1,456,978 $ 24,793,274
=========== =============
Dividend Reinvestment:
Class A..................... 258,526 $ 4,396,599
Class B..................... 31,979 544,950
Class C..................... 3,266 55,381
----------- -------------
Total Dividend Reinvestment... 293,771 $ 4,996,930
=========== =============
Repurchases:
Class A..................... (1,170,822) $(19,801,544)
Class B..................... (157,415) (2,652,072)
Class C..................... (112,218) (1,917,848)
----------- -------------
Total Repurchases............. (1,440,455) $(24,371,464)
=========== =============
</TABLE>
B-57
<PAGE> 560
Notes to Financial Statements (Continued)
December 31, 1995
- ------------------------------------------------------------------------------
At December 31, 1994, capital aggregated $138,705,152, $19,509,963 and
$3,470,128 for Classes A, B and C, respectively. For the year ended December
31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................... 1,342,809 $ 23,002,264
Class B..................... 414,834 7,100,815
Class C..................... 82,157 1,436,384
----------- -------------
Total Sales................... 1,839,800 $ 31,539,463
=========== =============
Dividend Reinvestment:
Class A..................... 281,094 $ 4,667,614
Class B..................... 30,434 504,221
Class C..................... 8,764 146,359
----------- -------------
Total Dividend Reinvestment... 320,292 $ 5,318,194
=========== =============
Repurchases:
Class A..................... (1,641,222) $(27,094,273)
Class B..................... (206,014) (3,292,413)
Class C..................... (132,758) (2,109,566)
----------- -------------
Total Repurchases............. (1,979,994) $(32,496,252)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within four years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
- ----------------------------------------------
<S> <C> <C>
First.................. 3.00% 1.00%
Second................. 2.50% None
Third.................. 2.00% None
Fourth................. 1.00% None
Fifth and Thereafter... None None
</TABLE>
B-58
<PAGE> 561
Notes to Financial Statements (Continued)
December 31, 1995
- -------------------------------------------------------------------------------
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
$31,800 and CDSC on the redeemed shares of Classes B and C of approximately
$56,900. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995 were $73,460,026 and
$68,394,721, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Futures Contracts-- A futures contract is an agreement involving the
delivery of a particular asset on a specified future date at an agreed upon
price. The Fund generally invests in futures on U.S. Treasury Bonds and the
Municipal Bond Index and typically closes the contract prior to the delivery
date. These contracts are generally used to manage the portfolio's effective
maturity and duration.
The fluctuation in market value of the contracts is settled daily through a
cash margin account.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------------
<S> <C>
Outstanding at December 31, 1994......... 400
Futures Opened........................... 500
Futures Closed........................... (900)
---------
Outstanding at December 31, 1995......... -0-
=========
</TABLE>
B-59
<PAGE> 562
Notes to Financial Statements (Continued)
December 31, 1995
- ------------------------------------------------------------------------------
B. Indexed Securities--These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to
a short- term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed
coupon component of the underlying bond is adjusted by the difference between
the securities fixed swap rate and the floating swap index. As the floating
rate rises, the coupon is reduced. Conversely, as the floating rate declines,
the coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $192,000.
B-60
<PAGE> 563
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> 564
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
B-2
<PAGE> 565
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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<PAGE> 573
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap
B-11
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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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<PAGE> 575
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
</TABLE>
B-13
<PAGE> 576
<TABLE>
<S> <C>
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major categories.
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgement with respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flows.
</TABLE>
B-14
<PAGE> 577
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.
B-15
<PAGE> 578
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by
the issuer or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
</TABLE>
B-16
<PAGE> 579
<TABLE>
<S> <C>
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes the probable credit stature upon completion of
construction or elimination of the basis of the condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
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<PAGE> 580
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>
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<PAGE> 581
<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> 582
<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> 583
<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> 584
<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> 585
<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> 586
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> 587
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> 588
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> 589
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> 590
(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> 591
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> 592
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> 593
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> 594
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> 595
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> 596
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> 597
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> 598
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> 599
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> 600
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> 601
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> 602
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> 603
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> 604
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> 605
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> 606
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> 607
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> 608
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> 609
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> 610
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> 611
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> 612
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> 613
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> 614
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> 615
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> 616
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> 617
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> 618
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> 619
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> 620
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> 621
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
Van Kampen American Capital Intermediate Term Municipal Income Fund (the
"Fund"), formerly known as Van Kampen American Capital Limited Term Municipal
Income 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 total 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-19
Investment Advisory and Other Services............................................... B-27
Custodian and Independent Auditors................................................... B-29
Portfolio Transactions and Brokerage Allocation...................................... B-29
Tax Status of the Fund............................................................... B-30
The Distributor...................................................................... B-30
Legal Counsel........................................................................ B-31
Performance Information.............................................................. B-31
Independent Auditors' Report......................................................... B-34
Financial Statements................................................................. B-35
Notes to Financial Statements........................................................ B-44
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 622
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 Municipal
Income 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 Florida Insured
Tax Free Income Fund, Van Kampen American Capital New Jersey Tax Free Income
Fund and Van Kampen American Capital New York Tax Free Income Fund have been
organized as series of the Trust and have commenced investment operations. Van
Kampen American Capital California Tax Free Income Fund, Van Kampen American
Capital Michigan Tax Free Income Fund, Van Kampen American Capital Missouri Tax
Free Income Fund and Van Kampen American Capital Ohio Tax Free Income Fund have
been organized as series of the Trust but have not commenced investment
operations. Other series may be organized and offered in the future.
The 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. The Trust can
issue an unlimited number of shares, $0.01 per share (prior to July 31, 1995,
the shares had no par value). 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 under the name Van Kampen Merritt Limited Term Municipal
Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts
business trust. The Fund was reorganized as a series of the Trust on July 31,
1995 and was renamed as of January 26, 1996.
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 (determined at the time of investment) would then be
invested in securities of a
B-2
<PAGE> 623
single 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; however, 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 securities
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, except to the extent the obligations the
Fund may invest in are considered to be loans and except to the extent
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 Strategic 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC 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 municipal securities 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 except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent that the securities that the Fund may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under agreements
relating to such municipal securities (in which case the Fund may
liquidate real estate acquired as a result of a default on a mortgage),
and except to the extent that Strategic Transactions the Fund may engage
in 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 shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at
B-3
<PAGE> 624
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. The Fund may have annual portfolio
turnover rates in excess of 100%. Portfolio turnover will be 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 will be excluded from such calculation.
Under current market conditions, the Fund anticipates that it will limit the
dollar-weighted average life of its portfolio to between three and ten years.
There is no limitation with respect to the anticipated life or stated maturity
of individual municipal securities in the Fund's portfolio. The weighted average
life of a security is generally a measure of the anticipated period until the
principal amount of the obligation is repaid, taking into account such factors
as scheduled amortization, anticipated prepayments, put, call or redemption
features and market conditions.
The Fund does not intend to lend its portfolio securities.
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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. 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 an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. 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
B-4
<PAGE> 625
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. The Fund will invest in lease obligations which contain
non-appropriation clauses only if such obligations are rated investment grade,
at the time of investment.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
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.
Although the Fund will invest at least 65% of its total 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
B-5
<PAGE> 626
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. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest and/or repay principal in accordance with their terms.
The Fund may invest the remainder of its total assets in lower grade 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 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 municipal securities is considered generally
to be less liquid than the market for investment grade 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 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
municipal securities and adversely affect the market value of such securities.
In addition, in such circumstances, the ability of issuers of lower grade
municipal securities to repay principal and
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<PAGE> 627
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 such securities and adversely affect the
value of the lower grade municipal securities in the Fund's portfolio and thus
the Fund's net asset value. The secondary market prices of lower grade municipal
securities are less sensitive to changes in interest rates than are those for
higher rated 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 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 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 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 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, Moody's or another NRSRO in evaluating 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 municipal securities
held in the Fund's portfolio.
Because issuers of lower grade 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 in 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.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, 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
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<PAGE> 628
be liquid. The Fund's policy with respect to investment in illiquid and
restricted securities is not a fundamental policy and may be changed by the
Board of Trustees, in consultation with the adviser, without obtaining
shareholder approval.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the 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.
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GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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
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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 Standard &
Poors Ratings Group ("S&P") or "P-1" from Moody's Investors Service, Inc.
("Moody's") or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the over-the-counter markets. All calls sold
by the Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
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.
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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) for other than bona fide hedging purposes 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 net 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
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
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exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will 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
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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 the Code for qualification as a regulated investment company.
See "Tax Status" in the Prospectus.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings (as
published by S&P) follows:
1. Debt
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer
or obtained by S&P from other sources it considers reliable. S&P does not
perform any audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
B-13
<PAGE> 634
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 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 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 of exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
B-14
<PAGE> 635
<TABLE>
<S> <C>
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
rating categories.
C The letter 'c' indicates that the holders 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 judgment
with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
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 obliger 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," and "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.
</TABLE>
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<PAGE> 636
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.
<TABLE>
<S> <C>
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1.'
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>
A commercial paper rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer or obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information or based on other information.
VARIABLE RATE DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.
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 are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned.
B-16
<PAGE> 637
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
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered 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 sometime in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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 which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
B-17
<PAGE> 638
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 bonds of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
B-18
<PAGE> 639
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.
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.
</TABLE>
B-19
<PAGE> 640
<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
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-20
<PAGE> 641
<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>
</TABLE>
<TABLE>
<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-21
<PAGE> 642
<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-22
<PAGE> 643
<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-23
<PAGE> 644
<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-24
<PAGE> 645
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-25
<PAGE> 646
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 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>
R. J. Holuba & S. J. Holuba & A. Holuba Co. TR........... 23,511 C 6.10%
U/A 10/31/86
Stanson Chemicals Trust
U/wat Stanley Joseph Holuba Decd
2 Hackensack Avenue
Kearny, NJ 07032-4611
Edward D. Jones and Co. F/A/O............................ 27,601 C 7.16%
William J. Cole TTEE
U/A DTD 12/30/86
EDJ #398-03812-1-8
P.O. Box 2500
Maryland Heights, MO 63043-8500
</TABLE>
B-26
<PAGE> 647
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 10, 1996 SHARES OWNERSHIP
- --------------------------------------------------------- -------------- -------- ---------
<S> <C> <C> <C>
Edward D. Jones and Co. F/A/O............................ 27,601 C 7.16%
William J. Cole TTEE
U/A DTD 12/30/86
EDJ #398-03811-1-9
P.O. Box 2500
Maryland Heights, MO 63043-8500
Stanley J. & Robert J. Holuba Co. TR..................... 46,679 C 12.11%
U/A 10/31/86 Article 6
Stanley Joseph Holuba Trust
2 Hackensack Avenue
Kearny, NJ 07032-4611
Edward D. Jones & Co. F/A/O.............................. 50,081 C 12.99%
Earl K. Rush &
EDJ # 286-04210-1-1
P.O. Box 2500
Maryland Heights, MO 63043-8500
Stanley Jacob Holuba..................................... 55,183 C 14.32%
Robert Joseph Holuba Co. TR
U/A 11/09/87 ART 9th
Stanley Joseph Holuba Trust
2 Hackensack Avenue
Kearny, NJ 07032-4611
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The Fund's portfolio is managed by Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") which is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"), a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. 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. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York-based private investment firm. Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P.") is the general partner of C&D 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. Certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 13% of the common stock of VK/AC Holding, Inc. The
address of Clayton, Dubilier & Rice, Inc. is 126 East 56th Street, New York, New
York 10022 and the address of each of C&D Associates L.P., C&D L.P. and CDV
Holding, Inc. is 270 Greenwich Avenue, Greenwich, Connecticut 06830. Presently,
and after giving effect to the exercise of stock options, no officer or trustee
of the Fund owns or would own 5% or more of the common stock of VK/AC Holding,
Inc.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
B-27
<PAGE> 648
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 ending December 31, 1995 and December 31, 1994 and the period
ended December 31, 1993, the Fund paid $0, $0 and $0, 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 ending December 31, 1995 and December 31, 1994 and the period
ended December 31, 1993, the Fund paid expenses of approximately $8,100, $16,500
and $3,300, respectively, representing the Distributor's cost of providing
certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares equally with the other Van Kampen American Capital mutual funds
advised by the Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.
For the years ending December 31, 1995 and December 31, 1994 and the period
ended December 31, 1993, the Fund paid expenses of approximately $7,300, $4,100
and $1,500, respectively, representing the 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: 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.
B-28
<PAGE> 649
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 ending December 31, 1995 and December 31, 1994 and the period
ended December 31, 1993, the Fund paid expenses of approximately $8,200, $8,086
and $4,800, 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 service
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those 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 the
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Fund's Adviser may take into consideration that
certain firms (i) provide market, statistical or other research information to
the Fund and the Adviser, (ii) have sold or are selling shares of the Fund and
that certain firms and (iii) may select firms that are affiliated with the Fund,
the Adviser, or its distributor and other principal underwriters. If purchases
or sales of securities of the Fund and of one or more other investment companies
or clients supervised by the Adviser are considered at or about the same time,
transactions in such securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the Adviser, taking
into account the respective sizes of the Fund and other investment companies and
clients and the amount of securities to be purchased or sold. Although it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned, it is also
possible that the ability to participate in volume transactions and to negotiate
lower brokerage commissions will be beneficial to the Fund.
B-29
<PAGE> 650
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 will be subject to tax
if, among other things, 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 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 obligated to purchase only those
shares for which it has received purchase orders. Shares of the Fund may not be
purchased from the Distributor for consideration other than cash. A discussion
of how to purchase and redeem the Fund's shares and how the Fund's shares are
priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein 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 Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor
B-30
<PAGE> 651
and members of the NASD acting as securities dealers and NASD members or
eligible non-members acting as brokers or agents and similar agreements between
the Fund and financial intermediaries 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 Distribution Plan 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 $43,057, $173,591 and $45,692 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $38,910, $41,647 and $26,881
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares, Class B Shares and Class C Shares, respectively. For the year
ended December 31, 1995, the Fund has reimbursed the Distributor $4,217 and
$4,412 for advertising expenses, and $360 and $437 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. CDSC Shares may be
B-31
<PAGE> 652
subject to a contingent deferred sales charge. 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 non-standardized 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,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.
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.
CLASS A SHARES
The average total return including payment of the sales charge with respect to
the Class A Shares for (i) the one year period ended December 31, 1995 was
11.57% and (ii) the approximately two year seven month period from May 28, 1993
(the commencement of investment operations of the Fund) through December 31,
1995 was 5.98%.
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 4.14%. The tax-equivalent 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" and assuming a
B-32
<PAGE> 653
36% tax rate) was 6.47%. 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
4.47%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to December 31, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 16.18%.
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
December 31, 1995 was 20.14%.
CLASS B SHARES
The average total return including payment of CDSC with respect to the Class B
Shares for (i) the one year period ended December 31, 1995 was 11.62% and (ii)
the approximately two year seven month period of
May 28, 1993 (commencement of distribution) through December 31, 1995 was 5.89%.
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 3.52%. The tax-equivalent 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" and assuming a 36% tax rate) was 5.50%. 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 3.92%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 15.94%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
was 2.90%.
CLASS C SHARES
The average total return including payment of sales charge with respect to the
Class C Shares for (i) the one year period ended December 31, 1995 was 13.74%
and (ii) the approximately two year three month period of October 19, 1993
(commencement of distribution) through December 31, 1995 was 4.32%.
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 3.52%. The tax-equivalent 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" and assuming a 36% tax rate) was 5.20%. 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 3.92%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 9.99%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
was 9.99%.
B-33
<PAGE> 654
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen American Capital Limited Term Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Limited Term 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. 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 Limited Term Municipal Income Fund as of December 31,
1995, the results of its operations for the year then ended, and 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-34
<PAGE> 655
Portfolio of Investments
December 31, 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
Arizona 4.5%
$ 1,500 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig
Irvington Proj Tucson Ser A Rfdg (FSA Insd) ......... 7.250% 07/15/10 $ 1,705,410
------------
California 6.3%
1,000 California St Var Rate Cpn (AMBAC Insd) ............. 6.400 09/01/08 1,130,660
540 Montebello, CA Unified Sch Dist Ctfs Partn Cap Impts
Proj ................................................ 5.900 06/01/04 540,324
660 Pleasanton, CA Jt Pwrs Fin Auth Rev Ser A ........... 6.000 09/02/05 710,873
------------
2,381,857
------------
Colorado 6.3%
330 Colorado Hsg Fin Auth Access Pgm Single Family
Pgm Ser E ........................................... 8.125 12/01/24 374,929
1,000 Denver, CO City & Cnty Arpt Rev Ser A ............... 7.400 11/15/04 1,120,030
500 Montrose Cnty, CO Ctfs Partn ........................ 6.000 06/15/01 506,940
400 Montrose Cnty, CO Ctfs Partn ........................ 6.100 06/15/02 405,520
------------
2,407,419
------------
Florida 3.2%
1,150 Florida Hsg Fin Agy Maitland Club Apts Ser B 1
(AMBAC Insd) ........................................ 6.750 08/01/14 1,232,524
------------
Georgia 7.5%
1,050 Atlanta, GA Arpt Fac Rev ............................ 7.250 01/01/17 1,162,739
1,490 De Kalb Cnty, GA Hsg Auth Multi Family Hsg Rev North
Hill Apts Proj Rfdg (FNMA Collateralized) ........... 6.625 01/01/05 1,681,122
------------
2,843,861
------------
Hawaii 2.9%
1,000 Hawaii St Arpt Sys Rev Second Ser (FGIC Insd) ....... 7.500 07/01/20 1,122,000
------------
Illinois 10.8%
250 Bellevue, IL Indl Dev First Mtg Rev Kmart Corp
Proj Rfdg ........................................... 6.250 04/01/09 211,715
235 Danville, IL Single Family Mtg Rev Rfdg ............. 7.300 11/01/10 244,924
1,335 Illinois Dev Fin Auth Elderly Hsg Rev Libertyville
Twrs A .............................................. 6.500 09/01/09 1,390,256
750 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj Ser
94-A ................................................ 6.250 03/01/04 775,095
400 Illinois Hlth Fac Auth Rev Swedish Covenant Ser A
Rfdg & Impt ......................................... 5.800 08/01/03 422,048
340 Macon County, IL Rev Cap Apprec Millikin Univ (AMBAC
Insd) ............................................... * 10/01/06 198,846
370 Macon County, IL Rev Cap Apprec Millikin Univ (AMBAC
Insd) ............................................... * 10/01/07 203,751
410 Macon County, IL Rev Cap Apprec Millikin Univ (AMBAC
Insd) ............................................... * 10/01/08 213,356
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 656
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Illinois (Continued)
$ 455 Macon County, IL Rev Cap Apprec Millikin Univ (AMBAC
Insd) ................................................ *% 10/01/09 $ 222,763
500 Macon County, IL Rev Cap Apprec Millikin Univ (AMBAC
Insd) ................................................ * 10/01/10 229,090
-----------
4,111,844
-----------
Kansas .6%
195 Labette Cnty, KS Single Family Mtg Rev Ser A Rfdg .... 8.400 12/01/11 213,504
-----------
Kentucky 1.0%
375 Jefferson Cnty, KY Multi Family Rev Hsg Whipps
Mill Proj Ser A Rfdg ................................. 5.875 06/01/04 385,028
-----------
Massachusetts 5.8%
470 Boston, MA Wtr & Swr Comm Rev Ser A .................. 9.250 01/01/11 654,456
400 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem
Med Cent Ser A ....................................... 5.750 10/01/06 352,936
1,000 South Essex, MA Swr Dist Ser B (MBIA Insd) ........... 7.500 06/01/05 1,200,930
-----------
2,208,322
-----------
Missouri 5.9%
1,500 Kansas City, MO Arpt Rev Genl Impt Ser A
(Cap Guar Insd) ...................................... 7.000 09/01/12 1,692,090
500 Missouri St Hsg Dev Comm Mtg Single Family Homeowner
Ser C (GNMA Collateralized) .......................... 7.250 09/01/26 552,020
-----------
2,244,110
-----------
New Hampshire .5%
200 New Hampshire Higher Edl & Hlth Fac Auth Rev Hosp
Nashua Mem Hosp ...................................... 5.500 10/01/02 202,908
-----------
New Jersey 3.1%
1,000 New Jersey Hlthcare Fac Fin Auth Rev
Christ Hosp Group Issue (Connie Lee Insd) ............ 7.000 07/01/06 1,169,500
-----------
New York 10.5%
390 Erie Cnty, NY Indl Dev Agy Civic Fac Rev
Mercy Hosp Buffalo Proj Ser A ........................ 5.900 06/01/03 402,738
1,185 New York St Environmental Fac Corp Pollutn Ctl Rev St
Wtr Revolving Fd ..................................... 7.000 06/15/12 1,325,991
1,000 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser
A (AMBAC Insd) ....................................... 6.200 08/15/05 1,112,980
1,000 Niagara Falls, NY Pub Impt (MBIA Insd) ............... 6.900 03/01/20 1,146,370
-----------
3,988,079
-----------
Ohio 2.7%
1,000 Ohio St Air Quality Dev Auth Rev Owens Corning
Fiberglas Proj Rfdg .................................. 6.250 06/01/04 1,039,040
-----------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 657
Portfolio of Investments (Continued)
December 31, 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oklahoma 1.8%
$ 660 Shawnee, OK Hosp Auth Hosp Rev Midamerica
Hlthcare Inc Rfdg ................................... 5.750% 10/01/03 $ 676,520
----------
Pennsylvania 7.6%
1,000 Cumberland Cnty, PA Muni Auth Rev First Mtg
Carlisle Hosp & Hlth ................................ 5.500 11/15/98 1,007,330
225 Erie, PA Higher Edl Bldg Auth College Rev Mercyhurst
College Proj A Rfdg ................................. 5.300 03/15/03 230,121
1,000 Pennsylvania Intergovt Coop Auth Spl Tax Rev
Philadelphia Funding Pgm (FGIC Insd) ................ 6.750 06/15/21 1,136,680
500 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Friends Hosp ........................................ 5.950 05/01/04 519,585
----------
2,893,716
----------
Texas 3.9%
500 Brazos Cnty, TX Hlth Fac Dev Corp Franciscan Svcs
Corp Rev Saint Joseph Rfdg .......................... 5.600 01/01/03 509,560
965 Texas St ............................................ 6.350 12/01/13 991,251
----------
1,500,811
----------
Utah 5.8%
2,080 Utah St Hsg Fin Agy Single Family Mtg Mezz
Ser A-1 (FHA Gtd) ................................... 7.150 07/01/12 2,200,203
----------
Guam 4.1%
1,550 Guam Govt Ser A ..................................... 5.500 09/01/01 1,568,677
----------
Total Long-Term Investments 94.8%
(Cost $33,858,657) <F1>...................................................... 36,095,333
Other Assets in Excess of Liabilities 5.2%.................................... 1,990,962
----------
Net Assets 100%............................................................... $38,086,295
===========
*Zero coupon bond
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is $33,858,657;
the aggregate gross unrealized appreciation is $2,312,522 and the
aggregate gross unrealized depreciation is $75,846, resulting in net
unrealized appreciation of $2,236,676.
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.
</TABLE>
<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
AAA..... 46.0%
AA...... 8.2
A....... 17.9
BBB..... 26.9
B....... 1.0
-------
100.0%
=======
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 658
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
December 31, 1995
- -------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $33,858,657) (Note 1).......................... $ 36,095,333
Cash.............................................................................. 1,442,369
Receivables:
Interest........................................................................ 728,320
Investments Sold................................................................ 90,105
Fund Shares Sold................................................................ 158
Unamortized Organizational Expenses and Initial Registration Costs (Note 1)....... 28,849
Other............................................................................. 820
--------------
Total Assets.................................................................. 38,385,954
--------------
Liabilities:
Payables:
Fund Shares Repurchased......................................................... 69,029
Income Distributions............................................................ 45,327
Accrued Expenses.................................................................. 185,303
--------------
Total Liabilities............................................................. 299,659
--------------
Net Assets........................................................................ $ 38,086,295
==============
Net Assets Consist of:
Capital (Note 3).................................................................. $ 36,760,721
Net Unrealized Appreciation on Investments........................................ 2,236,676
Accumulated Undistributed Net Investment Income................................... 122,028
Accumulated Net Realized Loss on Investments...................................... (1,033,130)
--------------
Net Assets........................................................................ $ 38,086,295
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$15,612,391 and 1,521,067 shares of capital stock issued and outstanding)
(Note 3)...................................................................... $ 10.26
Maximum sales charge (3.25%* of offering price)............................... .34
--------------
Maximum offering price to public.............................................. $ 10.60
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$17,530,702 and 1,708,127 shares of capital stock issued and outstanding)
(Note 3)...................................................................... $ 10.26
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$4,943,202 and 481,795 shares of capital stock issued and outstanding)
(Note 3)...................................................................... $ 10.26
==============
</TABLE>
*On sales of $25,000 or more, the sales charge will be
reduced.
See Notes to Financial Statements
B-38
<PAGE> 659
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest............................................................................ $ 2,302,282
---------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $43,057,
$173,591 and $45,692, respectively) (Note 5)...................................... 262,340
Investment Advisory Fee (Note 2).................................................... 188,923
Custody............................................................................. 61,482
Shareholder Services (Note 2)....................................................... 56,026
Trustees Fees and Expenses (Note 2)................................................. 46,654
Printing............................................................................ 43,190
Legal (Note 2)...................................................................... 16,772
Amortization of Organizational Expenses and Initial Registration Costs (Note 1)..... 11,994
Other............................................................................... 85,446
---------------
Total Expenses.................................................................. 772,827
Less Fees Waived and Expenses Reimbursed ($188,923 and $41,405, respectively)... 230,328
---------------
Net Expenses.................................................................... 542,499
---------------
Net Investment Income............................................................... $ 1,759,783
===============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................. $ 31,006,266
Cost of Securities Sold......................................................... (30,420,474)
---------------
Net Realized Gain on Investments.................................................... 585,792
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period........................................................... (730,149)
End of the Period................................................................. 2,236,676
---------------
Net Unrealized Appreciation on Investments During the Period........................ 2,966,825
---------------
Net Realized and Unrealized Gain on Investments..................................... $ 3,552,617
===============
Net Increase in Net Assets from Operations.......................................... $ 5,312,400
===============
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 660
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Years Ended December 31, 1995 and 1994
- --------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................. $ 1,759,783 $ 1,662,700
Net Realized Gain/Loss on Investments............................. 585,792 (1,618,922)
Net Unrealized Appreciation/Depreciation on Investments During
the Period...................................................... 2,966,825 (1,358,144)
----------------- -----------------
Change in Net Assets from Operations ............................. 5,312,400 (1,314,366)
----------------- -----------------
Distributions from Net Investment Income:
Class A Shares.................................................. (757,945) (787,021)
Class B Shares.................................................. (704,432) (749,473)
Class C Shares.................................................. (185,738) (121,533)
----------------- -----------------
Total Distributions........................................... (1,648,115) (1,658,027)
----------------- -----------------
Net Change in Net Assets from Investment Activities............... 3,664,285 (2,972,393)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold......................................... 4,993,059 19,067,615
Net Asset Value of Shares Issued Through Dividend Reinvestment.... 1,091,043 1,096,122
Cost of Shares Repurchased........................................ (9,751,835) (7,289,151)
----------------- -----------------
Net Change in Net Assets from Capital Transactions................ (3,667,733) 12,874,586
----------------- -----------------
Total Increase/Decrease in Net Assets............................. (3,448) 9,902,193
Net Assets:
Beginning of the Period........................................... 38,089,743 28,187,550
----------------- -----------------
End of the Period (Including undistributed net investment income
of $122,028 and $10,360, respectively) ......................... $ 38,086,295 $ 38,089,743
================= =================
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 661
<TABLE>
<CAPTION>
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------------------------
May 28, 1993
Year Year (Commencement
Ended Ended of Investment
December 31, December 31, Operations) to
Class A Shares 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period ......... $ 9.330 $ 10.145 $ 9.700
------------ ------------ -----------------
Net Investment Income........................... .508 .489 .278
Net Realized and Unrealized Gain/Loss on
Investments................................... .900 (.815) .462
------------ ------------ -----------------
Total from Investment Operations.................. 1.408 (.326) .740
------------ ------------ -----------------
Less:
Distributions from Net Investment Income........ .474 .489 .273
Distributions from Net Realized Gain on
Investments................................... -0- -0- .022
------------ ------------ -----------------
Total Distributions............................... .474 .489 .295
------------ ------------ -----------------
Net Asset Value, End of the Period................ $ 10.264 $ 9.330 $ 10.145
============ ============ =================
Total Return*..................................... 15.31% (3.32%) 7.75%**
Net Assets at End of the Period (In millions)..... $ 15.6 $ 15.7 $ 14.0
Ratio of Expenses to Average Net
Assets* (Annualized)............................ 1.00% .67% .14%
Ratio of Net Investment Income to
Average Net Assets* (Annualized).................. 5.10% 5.07% 4.78%
Portfolio Turnover................................ 75.11% 274.43% 85.56%
<CAPTION>
*If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<S> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (Annualized)............................. 1.61% 1.75% 2.21%
Ratio of Net Investment Income to
Average Net Assets (Annualized)................. 4.49% 3.99% 2.70%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-41
<PAGE> 662
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------
May 28, 1993
Year Year (Commencement
Ended Ended of Investment
December 31, December 31, Operations) to
Class B Shares 1995 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period ......... $ 9.319 $ 10.137 $ 9.700
------------ ------------ -----------------
Net Investment Income........................... .430 .417 .233
Net Realized and Unrealized Gain/Loss on
Investments................................... .916 (.818) .460
------------ ------------ -----------------
Total from Investment Operations.................. 1.346 (.401) .693
------------ ------------ -----------------
Less:
Distributions from Net Investment Income........ .402 .417 .234
Distributions from Net Realized Gain on
Investments................................... -0- -0- .022
------------ ------------ -----------------
Total Distributions............................... .402 .417 .256
------------ ------------ -----------------
Net Asset Value, End of the Period................ $ 10.263 $ 9.319 $ 10.137
============ ============ =================
Total Return*..................................... 14.62% (4.04%) 7.23%**
Net Assets at End of the Period (In millions)..... $ 17.5 $ 17.7 $ 13.9
Ratio of Expenses to Average Net
Assets* (Annualized)............................ 1.75% 1.43% .92%
Ratio of Net Investment Income to
Average Net Assets* (Annualized).................. 4.33% 4.30% 3.95%
Portfolio Turnover................................ 75.11% 274.43% 85.56%
<CAPTION>
*If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<S> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (Annualized)............................. 2.36% 2.50% 2.98%
Ratio of Net Investment Income to
Average Net Assets (Annualized)................. 3.72% 3.24% 1.89%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-42
<PAGE> 663
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------------------------
Year Year October 19, 1993
Ended Ended (Commencement
December 31, December 31, of Distribution) to
Class C Shares 1995 1994 December 31, 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period......... $ 9.314 $ 10.134 $ 10.250
------------ ------------ -------------------
Net Investment Income.......................... .430 .419 .091
Net Realized and Unrealized Gain/Loss on
Investments.................................. .918 (.822) (.098)
------------ ------------ -------------------
Total from Investment Operations................. 1.348 (.403) (.007)
------------ ------------ -------------------
Less:
Distributions from Net Investment Income....... .402 .417 .087
Distributions from Net Realized Gain on
Investments.................................. -0- -0- .022
------------ ------------ -------------------
Total Distributions.............................. .402 .417 .109
------------ ------------ -------------------
Net Asset Value, End of the Period............... $ 10.260 $ 9.314 $ 10.134
============ ============ ===================
Total Return*.................................... 14.74% (4.04%) (.10%)**
Net Assets at End of the Period (In millions).... $ 4.9 $ 4.7 $ .3
Ratio of Expenses to Average Net
Assets* (Annualized)........................... 1.74% 1.43% .97%
Ratio of Net Investment Income to
Average Net Assets* (Annualized)................. 4.36% 4.34% 4.05%
Portfolio Turnover............................... 75.11% 274.43% 85.56%
<CAPTION>
*If certain expenses had not been assumed by VKAC, total return would have
been lower and the ratios would have been as follows:
<S> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (Annualized)............................ 2.34% 2.46% 2.97%
Ratio of Net Investment Income to
Average Net Assets (Annualized)................ 3.75% 3.31% 2.06%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-43
<PAGE> 664
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital Limited Term Municipal Income Fund (the "Fund") is
organized as a series of Van Kampen American Capital Tax Free Trust (the
"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 seek a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Fund commenced investment operations on May 28, 1993 with two classes of
common shares, Class A and Class B shares. The distribution of the Fund's Class
C shares commenced on October 19, 1993.
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. As of December 31, 1995, there were
no when issued or delayed delivery purchase commitments.
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 amount 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.
B-44
<PAGE> 665
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
D. Organizational Expenses and Initial Registration Costs-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 and initial registration in the amount of $60,000. These costs are
being amortized on a straight line basis over the 60 month period ending May 27,
1998. Van Kampen American Capital Investment Advisory Corp. (the "Adviser") has
agreed that in the event any of the initial shares of the Fund originally
purchased by VKAC are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses and initial registration
costs in the same proportion as the number of shares redeemed bears to the
number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such losses against any future realized capital gains.
At December 31, 1995, the Fund had an accumulated capital loss carryforward of
$1,033,130, of which $849,643 and $183,487 will expire on December 31, 2002 and
2003, respectively. Net realized gains or losses may differ for financial and
tax reporting purposes primarily as a result of post October 31 losses which
are not recognized for tax purposes until the first day of the following fiscal
year.
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.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide facilities and investment advice to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ------------------------------------
<S> <C>
First $500 million..... .500 of 1%
Over $500 million...... .450 of 1%
</TABLE>
B-45
<PAGE> 666
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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 $23,600 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 $16,900,
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 $34,000.
At December 31, 1995, VKAC owned 1,000, 100 and 100 shares of beneficial
interest of Classes A, B and C, respectively.
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.
B-46
<PAGE> 667
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1995, capital aggregated $15,073,760, $17,035,048 and
$4,651,913 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...................... 132,361 $ 1,315,355
Class B...................... 172,036 1,724,905
Class C...................... 197,244 1,952,799
---------- ---------------
Total Sales.................... 501,641 $ 4,993,059
========== ===============
Dividend Reinvestment:
Class A...................... 51,462 $ 512,479
Class B...................... 41,187 409,706
Class C...................... 16,979 168,858
---------- ---------------
Total Dividend Reinvestment.... 109,628 $ 1,091,043
========== ===============
Repurchases:
Class A...................... (346,026) $ (3,440,596)
Class B...................... (400,845) (3,959,338)
Class C...................... (238,970) (2,351,901)
---------- ---------------
Total Repurchases.............. (985,841) $ (9,751,835)
========== ===============
</TABLE>
B-47
<PAGE> 668
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1994, capital aggregated $16,686,522, $18,859,775 and
$4,882,157 for Classes A, B and C, respectively. For the year ended December 31,
1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................... 611,527 $ 5,970,329
Class B...................... 794,014 7,783,860
Class C...................... 555,340 5,313,426
---------- ---------------
Total Sales.................... 1,960,881 $ 19,067,615
========== ===============
Dividend Reinvestment:
Class A...................... 54,779 $ 528,311
Class B...................... 48,361 465,700
Class C...................... 10,697 102,111
---------- ---------------
Total Dividend Reinvestment.... 113,837 $ 1,096,122
========== ===============
Repurchases:
Class A...................... (359,335) $ (3,439,466)
Class B...................... (316,420) (2,980,786)
Class C...................... (92,860) (868,899)
---------- ---------------
Total Repurchases.............. (768,615) $ (7,289,151)
---------- ---------------
</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 for Class B and
Class C shares will be imposed on most redemptions made within four years of the
purchase for Class B and one year of the purchase for Class C as detailed in the
following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
- -------------------------------------------
<S> <C> <C>
First.................... 3.00% 1.00%
Second................... 2.50% None
Third.................... 2.00% None
Fourth................... 1.00% None
Fifth and Thereafter..... None None
</TABLE>
B-48
<PAGE> 669
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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
$1,900 and CDSC on the redeemed shares of Classes B and C of approximately
$64,700. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $27,937,477 and
$30,420,474, respectively.
5. 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% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $151,100.
B-49
<PAGE> 670
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
Van Kampen American Capital Florida Insured Tax Free Income Fund, formerly
known as Van Kampen Merritt Florida Insured Tax Free Income Fund (the "Fund"),
seeks to provide investors with high current income exempt from federal income
tax and Florida intangible personal property taxes consistent with preservation
of capital. The Fund is designed for investors who reside in Florida for tax
purposes. The Fund attempts to achieve its investment objective by investing at
least 80% of its assets in a portfolio of Florida insured municipal securities
that are insured as to timely payment of both principal and interest by an
entity whose claims-paying ability is rated AAA by Standard & Poor's Ratings
Group ("S&P") or Aaa by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating from another nationally recognized statistical rating
organization ("NRSRO"). Insured municipal securities in which the Fund may
invest include conventional fixed-rate municipal securities, variable rate
municipal securities and other types of municipal securities described herein.
Up to 20% of the Fund's total assets may consist of uninsured Florida 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>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Description of Municipal Securities Ratings.......................................... B-18
Description of Insurance Company Claims Paying Ability Ratings....................... B-23
Trustees and Officers................................................................ B-24
Investment Advisory and Other Services............................................... B-32
Custodian and Independent Auditors................................................... B-33
Portfolio Transactions and Brokerage Allocation...................................... B-33
Tax Status of the Fund............................................................... B-34
The Distributor...................................................................... B-35
Legal Counsel........................................................................ B-36
Performance Information.............................................................. B-36
Independent Auditors' Report......................................................... B-39
Financial Statements................................................................. B-40
Notes to Financial Statements........................................................ B-48
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 671
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end non-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 Municipal Income Fund, Van Kampen American
Capital Intermediate Term Municipal Income Fund, Van Kampen American Capital
California Insured Tax Free Fund, Van Kampen American Capital New Jersey Tax
Free Income Fund and Van Kampen American Capital New York Tax Free Fund have
each been organized as a 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 each been organized as a series of the Trust but have not
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 (the "Declaration
of Trust") dated May 10, 1995. 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. The Trust can issue an
unlimited number of shares, par value $0.01 (prior to July 31, 1995, the shares
had no par value). 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 in 1994 under the name Van Kampen Merritt Florida Insured Tax Free
Fund as a sub-trust of the Van Kampen Merritt Tax Free Trust, a Massachusetts
business trust. 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. Invest more than 25% of its assets in a single industry; however, 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
B-2
<PAGE> 672
bond market; however, the Fund will not invest more than 25% of its
assets in industrial development bonds in a single industry.
2. 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.
3. 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.
4. 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.
5. 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. 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.
7. 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.
8. 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.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
10. 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 that Strategic Transactions the Fund
may engage in 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 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.
B-3
<PAGE> 673
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 200%.
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 excise 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 State and local
governments or authorities of entities used to finance the acquisition of
equipment and facilities. Lease obligations generally 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. A risk exists that the municipality will not, or will be
unable to, appropriate money in the future in the event of political changes,
changes in the economic viability of the project, general economic changes or
for other reasons. 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 an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. Additionally,
use of the leased property may be limited by State or local law to a specified
use thereby further limiting ability to rent. 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. The
Fund will invest in lease obligations which contain non-appropriation clauses
only if such obligations are rated investment grade, at the time of investment.
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Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% 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. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Inverse floaters 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 inverse floaters in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
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.
Although the municipal securities in which the Fund may invest will be insured
as to timely payment of principal and interest, municipal securities, like other
debt obligations, are subject to the risk of non-payment. The ability of issuers
of municipal securities to make timely payments of interest and principal may be
adversely impacted in general economic downturns and as relative governmental
cost burdens are allocated and reallocated among federal, state and local
governmental units. Such non-payment would result in a reduction of income to
the Fund, and could result in a reduction in the value of the municipal security
experiencing non-payment and a potential decrease in the net asset value of the
Fund. Issuers of municipal securities might seek protection under the bankruptcy
laws. In the event of bankruptcy of such an issuer, the Fund could experience
delays and limitations with respect to the collection of principal and interest
on such municipal securities and the Fund may not, in all circumstances, be able
to collect all principal and interest to which it is entitled. To enforce its
rights in the event of a default in the payment of interest or repayment of
principal, or both, the Fund may take possession of and manage the assets
securing the issuer's obligations on such securities, which may increase the
Fund's operating expenses and adversely affect the net asset value of the Fund.
Any income derived from the Fund's ownership or operation of such assets may not
be tax-exempt. In addition, the Fund's intention to qualify as a "regulated
investment company" under the Internal Revenue
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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. Further, in connection with the
working out or restructuring of a defaulted security, the Fund may acquire
additional securities of the issuer, the acquisition of which may be deemed to
be a loan of money or property. Such additional securities should be considered
speculative with respect to the capacity to pay interest or repay principal in
accordance with their terms.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, 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. The Fund's policy
with respect to investment in illiquid and restricted securities is not a
fundamental policy and may be changed by the Board of Trustees, in consultation
with the Adviser, without obtaining shareholder approval.
INSURANCE
As described in the Prospectus, the Fund generally will invest substantially
all of its asset in municipal securities which are either pre-insured under a
policy obtained for such securities prior to the purchase of such securities or
will be insured under policies obtained by the Fund to cover otherwise uninsured
securities.
ORIGINAL ISSUE INSURANCE. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments shall become due but shall not be paid
by the issuer; except that in the event of any acceleration of the due date of
the principal by reason of mandatory or optional redemption (other than
acceleration by reason of a mandatory sinking fund payment), default or
otherwise, the payments insured may be made in such amounts and at such times as
payments of principal would have been due had there not been such acceleration.
The insurer is responsible for such payments less any amounts received by the
holder from any trustee for the municipal security issuers or from any other
source. Original Issue Insurance generally does not insure payment on an
accelerated basis, the payment of any redemption premium (except with respect to
certain premium payments in the case of certain small issue industrial
development and pollution control municipal securities), the value of the shares
of the Fund or the market value of municipal securities, or payments of any
tender purchase price upon the tender of the municipal securities. Original
Issue Insurance also does not insure against nonpayment of principal of or
interest on municipal securities resulting from the insolvency, negligence or
any other act or omission of the trustee or other paying agent for such
obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date of such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instrument of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon
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vest in the insurer. Upon payment by the insurer of any principal or interest
payments with respect to any municipal securities, the insurer shall succeed to
the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
SECONDARY MARKET INSURANCE. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal security
covered thereby remains outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal security.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
PORTFOLIO INSURANCE. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not
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have any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
It is anticipated that certain of the municipal securities to be purchased by
the Fund will be insured under policies obtained by persons other than the Fund.
In instances in which the Fund purchases municipal securities insured under
policies obtained by persons other than the Fund, the Fund does not pay the
premiums for such policies; rather the cost of such policies may be reflected in
a higher purchase price for such municipal securities. Accordingly, the yield on
such municipal securities may be lower than that on similar uninsured municipal
securities. Premiums for a Portfolio Insurance Policy generally are paid by the
Fund monthly, and are adjusted for purchases and sales of municipal securities
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered municipal securities held by
the Fund. In the event the Fund were to purchase Secondary Market Insurance with
respect to any municipal securities then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
Aaa by Moody's or an equivalent rating by another NRSRO, or if the Adviser
anticipates such a lowering or otherwise does not believe an insurer's
claims-paying ability merits its existing triple-A rating, the Fund could seek
to obtain additional insurance from an insurer whose claims-paying ability is
rated AAA by S&P, Aaa by Moody's or an equivalent rating by another NRSRO, or if
the Adviser determines that the cost of obtaining such additional insurance
outweigh the benefits, the Fund may elect not to obtain additional insurance. In
making such determination, the Adviser will consider the cost of the additional
insurance, the new claims-paying ability rating and financial condition of the
existing insurer and the
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creditworthiness of the issuer or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. In that regard, it should be noted
that the claims-paying abilities and debt ratings of several large insurers (at
least one of which insured municipal securities) recently have been lowered by
one or more of the nationally recognized securities rating agencies and that
many insurers currently are experiencing adverse results in their investment
portfolios. In addition, certain insurers' operations recently have been assumed
by their state regulatory agencies. The Fund cannot predict the consequences of
a state takeover of an insurer's obligations and, in particular, whether such an
insurer (or its state regulatory agency) could or would honour all of the
insurer's contractual obligations including any outstanding insurance contracts
insuring the timely payment of principal and interest on municipal securities.
The Fund cannot predict the impact which such events might have on the market
values of such municipal security. In the event of a default by an insurer on
its obligations with respect to any municipal securities in the Fund's
portfolio, the Fund would look to the issuer and/or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer
and/or guarantor may not be rated AAA by S&P, Aaa by Moody's or an equivalent
rating by another NRSRO. Accordingly, the Fund could be exposed to greater risk
of non-payment in such circumstances which could adversely affect the Fund's net
asset value and the market price per Common Share. Alternatively, the Fund could
elect to dispose of such municipal securities; however, the market prices for
such municipal securities may be lower than the Fund's purchase price for them
and the Fund could sustain a capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Common Shares.
SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES
GENERAL. As described in the Prospectus, except during temporary periods, the
Fund will invest substantially all of its assets in Florida municipal
securities. The Fund is therefore susceptible to political, economic, regulatory
or other factors affecting issuers of Florida municipal securities. In addition,
the specific Florida municipal securities in which the Fund will invest are
expected to change from time to time. The following information constitutes only
a brief summary of some of the complex factors which may have an impact on the
financial situation of issuers of Florida municipal securities and does not
purport to be a complete or exhaustive description of all adverse conditions to
which issuers of Florida municipal securities may be subject and is not
applicable to "conduit" obligations, such as industrial development revenue
bonds, with respect to which the public issuer itself has no financial
responsibility. Such information is derived from certain official statements of
the State of Florida published in connection with the issuance of specific State
of Florida securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund and may not apply to
all Florida municipal securities acquired by the Fund. The Fund assumes no
responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Fund cannot predict whether or to what extent such factors or other
factors may affect the issuers of Florida municipal securities, the market value
or marketability of such securities or the ability of the respective issuers of
such securities acquired by the Fund to pay interest on or principal of such
securities. The creditworthiness of obligations issued by local Florida issuers
may be unrelated to the creditworthiness of obligations issued by the State of
Florida, and there is no responsibility on the part of the State of Florida to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within Florida, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information
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set forth below is intended only as a general summary and not as a discussion of
any specific factors that may affect any particular issuer of Florida municipal
securities.
Florida state and local government obligations may be adversely affected by
political and economic conditions and developments within the State of Florida
and the nation as a whole. Florida's economic outlook is generally projected to
reflect the national economic outlook; however, unemployment levels during the
past several years have been above the national level and are estimated to
continue to be above the national level for the State's 1994-95 fiscal year
which ended June 30, 1995. The Florida constitution and statutes require a
balanced budget, which may affect the ability of the State of Florida to issue
and/or repay its obligations. In addition, various limitations on the State of
Florida, its governmental agencies and its local governments, including school
and special districts and authorities, may inhibit the ability of these issuers
to repay existing indebtedness and issue additional indebtedness. The ability of
such issuers to repay revenue bonds will also depend on the success of the
capital projects to which they relate. The ability of such issuers to repay
general obligation bonds will also depend on the success of such issuer
maintaining its ad valorem tax base.
INVESTMENT PRACTICES AND POLICIES OF ISSUERS OF FLORIDA MUNICIPAL
ISSUERS. Florida law does provide certain restrictions on the investment of
funds for the State of Florida and its local governments; however, with respect
to all municipalities and its charter counties, such restrictions may be limited
by the constitutional home rule powers of such entities. Although the Florida
municipal securities which may be purchased by the Fund will be insured, only
those securities which are insured by Original Issuance Insurance will contain
restrictions on investments imposed by the issuer of such insurance. Because
statutory restrictions on investments and investment policies with respect to
the investment of funds is limited by constitutional home rule powers, there can
be no assurance as to whether any issuer will suffer losses as a result of
investments or the magnitude or any such losses.
POPULATION, INCOME AND EMPLOYMENT. Florida has experienced a large population
growth. As of April 1, 1994, Florida ranks fourth with an estimated population
of 13.9 million. Since 1980, the State's population has increased approximately
40%. The personal income of residents of Florida has been growing strongly the
last several years and generally has historically outperformed both the nation
as a whole and the southeast in particular. The State's economy since the early
seventies has diversified in such a way as to provide a greater insulation from
national economic downturns. The structure of income of residents of Florida
differs from that of the nation and the southeast in that, due to a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (Social Security and pension benefits,
among other sources of income) are an important source of income.
Personal income growth in Florida is estimated at 7.1% and 6.9% for 1994-95
and 1995-96 respectively. By the end of the State's fiscal year 1995-96, real
personal income per capita in Florida is projected to average 4.5% higher than
the 1993-94 level.
Florida's economic dependence on the cyclical construction and construction
related manufacturing sectors had declined. The service sector is Florida's
largest employer. Presently, the State's service sector employment constitutes
86.4% of the total non-farm employment. While structurally the southeast and the
nation are endowed with a greater proportion of manufacturing jobs, which tend
to pay higher wages, service jobs are less sensitive to business cycle swings.
Since 1980, Florida's unemployment rate has generally tracked below that of
the nation; however, since 1989 the State's jobless rate has moved ahead of the
national average. The average rate of unemployment for Florida since 1985 is
6.3% while the national average during the same time period is 6.4%. Florida's
unemployment rate is forecasted at 5.6% for both fiscal year 1995-96 and 5.7%
for fiscal year 1996-97.
TOURISM INDUSTRY. Tourism is one of Florida's most important industries.
Approximately 39.9 million people visited the State in 1994. By the end of
fiscal year 1995-96, 41.4 million domestic and international tourists are
expected to have visited the State. In 1996-97 tourist arrivals should
approximate 43.2 million.
STATE FINANCIAL OPERATIONS. Financial operations of the State covering all
receipts and expenditures are maintained through the use of four funds--the
General Revenue Fund, Trust Funds, the Working Capital Fund, and the Budget
Stabilization Fund. In fiscal year 1994-95, the State derived an estimated 66%
of its total direct revenues to these funds from state taxes. Federal funds and
other special revenues accounted for
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the remaining revenues. Major sources of tax revenues to the General Revenue
Fund are the sales and use tax, corporate income tax, intangible personal
property tax, and beverage tax, which amounted to 67%, 7%, 4% and 4%,
respectively, of the total General Revenue funds available. State expenditures
are categorized for budget and appropriation purposes by type of fund and
spending unit, which are further subdivided by line item. In fiscal year
1993-94, appropriations from the General Revenue Fund for education, health and
welfare, and public safety amounted to approximately 49%, 32%, and 11%,
respectively, of total General Revenues.
The sales and use tax is the greatest single source of tax receipts in
Florida. The sales tax is 6% of the sales price of tangible personal property
sold at retail in the State. The use tax is at 6% of the cost price of tangible
personal property when the same is not sold but is used, or stored for use, in
the State. Slightly less than 10% of the sales tax is designated for local
governments and is distributed to the respective counties in which collected for
use by the county and the municipalities therein. In addition to this
distribution, local governments may (by referendum) assess certain discretionary
sales surtaxes within their county, for certain purposes, restricted as to
amount. The proceeds of these surtaxes are required to be applied to the
purposes for which such surtax is assessed.
For the State fiscal year which ended June 30, 1995, receipts from the sales
and use tax were $10,672 million, an increase of 6.0% from fiscal year 1993-94.
The second largest source of State tax receipts, including those distributed
to local governments, is the tax on motor fuels. Preliminary data show
collections from this source in the State fiscal year ending June 30, 1995 were
$1,924.6 million. However, these revenues are almost entirely trust funds
dedicated for specific purposes and are not included in the State General
Revenue Fund. Alcoholic beverage tax and license revenues totalled $437.3
million in the State fiscal year ended June 30, 1995. The receipts of corporate
income tax for the State fiscal year ended June 30, 1995 were $1,063.5 million,
an increase of 1.5% over the prior fiscal year. In November 1986, the voters of
the State approved a constitutional amendment to allow the State to operate a
lottery, the proceeds of which are required to be applied as follows: 50% to be
returned to the public as prizes, at least 38% to be deposited in the
Educational Enhancement Trust (for public education), and no more than 12% to be
spent on the administrative cost of operating the lottery. State fiscal year
1994-95 produced ticket sales of $2.19 billion of which education received
approximately $853.2 million.
The State Constitution does not permit a personal income tax. An amendment to
the State Constitution would be required to impose a personal income tax in the
State.
Estimated fiscal year 1995-96 General Revenue plus Working Capital and Budget
Stabilization funds available total $15,286.2 million, 3.1% increase over
1994-95.
In fiscal year 1996-97 estimated General Revenue plus Working Capital and
Budget Stabilization funds available total $15,922 million, a 4.2% increase over
1995-96. The $15,310.7 million in Estimated Revenues represent a 5.0% increase
over the analogous figure in 1994-95.
According to the Division of Bond Finance of the Department of General
Services of the State, as of February 16, 1996, the State maintains a high bond
rating from Moody's Investors Service, Inc. (Aa), Standard & Poor's Corporation
(AA) and Fitch Investors Service (AA) on the majority of its full faith and
credit bonds. Outstanding full faith and credit bonds at February 11, 1996
totalled approximately $7.54 billion, with an additional $242,695,000 issued
March 12, 1996.
LOCAL GOVERNMENT REVENUE SOURCES. County and municipal governments in Florida
depend primarily upon ad valorem property taxes, and sales, motor fuels and
other local excise taxes and miscellaneous revenue sources, including revenues
from utilities services. Florida school districts derive substantially all of
their revenues from local property taxes. The overall levels of revenues from
these sources is in part dependent upon the local, state and national economy.
Local government obligations held by the Fund may constitute general obligations
or may be special obligations payable solely from one or more specified revenue
sources. The ability of the local governments to repay their obligations on a
timely basis will be dependent upon the continued strength of the revenues
pledged and of the overall fiscal status of the local government.
STATE CONSTITUTIONAL AMENDMENT LIMITING STATE REVENUES. An amendment to the
Constitution of the State of Florida was approved by the voters of the State of
Florida at the November 1994 general election. This
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amendment limits the amount of taxes, fees, licenses and charges imposed by the
State Legislature and collected during any fiscal year to the amount of revenues
allowed for the prior fiscal year, plus an adjustment for growth. Growth is
defined as the amount equal to the average annual rate of growth in Florida
personal income over the most recent twenty quarters times the state revenues
allowed for the prior fiscal year. The revenues allowed for any fiscal year
could be increased by a two-thirds vote of the Legislature. The limit is
effective starting with fiscal year 1995-1996 which commenced July 1, 1995.
Excess revenues generated will initially be deposited in the budget
stabilization fund until it is fully funded; any additional excess revenues will
then be refunded to taxpayers. This amendment could limit the amount of actual
revenues from which the State of Florida could appropriate funds, including
funds appropriated to local governments. It is unclear at this point what
effect, if any, this amendment would have on local government debt obligations
payable from state revenues which may be subject to this amendment, such as
state revenue sharing moneys or other state revenues distributed to local
governments. Certain State of Florida debt obligations, which are not by their
terms subject to appropriation, should not be affected, depending upon the
language of the legislation authorizing the issuance of such obligations.
OTHER FACTORS. Florida will continue to face enormous spending pressures well
into the future. The large number of elderly residents will continue to demand
health services, an area where cost escalation is significant, and the constant
influx of people to Florida will continue to place sizable pressure on the State
for infrastructure needs.
The value of Florida municipal instruments may also be affected by general
conditions in the money markets or the municipal bond markets, the levels of
federal income tax rates, the supply of tax-exempt bonds, the credit quality and
rating of the issues and perceptions with respect to the level of interest
rates.
There can be no assurance that there will not be a decline in economic
conditions or that particular Florida municipal securities in the portfolio of
the Fund will not be adversely affected by any such changes.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
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Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such 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;
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(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 NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
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
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<PAGE> 684
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) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
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COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or 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
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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 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 any audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity to pay interest and
repay principal. Whereas it normally exhibits adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded as having predominantly
B speculative with respect to capacity to pay interest and repay principal. 'BB'
CCC indicates the lowest degree of speculation and 'C' the highest. While such debt
CC will likely have some quality and protective characteristics, these are
C 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.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of, or the risk of default
upon failure of, such completion. The investor should exercise his own
judgement with respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flows.
</TABLE>
B-19
<PAGE> 689
<TABLE>
<S> <C>
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
Debt Obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a
note rating. Notes maturing beyond 3 years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Strong or strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse Financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from
'A-1' for the highest quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>
B-20
<PAGE> 690
<TABLE>
<S> <C>
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.
</TABLE>
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all municipal debt issues that have a
demand or double feature as part of their provisions. 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 are used to denote the put option (for
example, 'AAA/A-1+'). With short-term demand debt, S&P's note rating
symbols are used with the commercial paper symbols (for example,
'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
</TABLE>
B-21
<PAGE> 691
<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 operation experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broadbased 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.
B-22
<PAGE> 692
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.
DESCRIPTION OF INSURANCE COMPANY CLAIMS PAYING ABILITY RATINGS
RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
The claims-paying ability of insurance companies is rated by S&P and Moody's.
Descriptions of these ratings are set forth below:
DESCRIPTION OF S&P'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Superior financial security on an absolute and relative basis. Capacity
to meet policyholder obligations is overwhelming under a variety of economic and
underwriting conditions.
AA. Excellent financial security. Capacity to meet policyholder obligations is
strong under a variety of economic and underwriting conditions.
A. Good financial security, but capacity to meet policyholder obligations is
somewhat susceptible to adverse economic and underwriting conditions.
BBB. Adequate financial security, but capacity to meet policyholder
obligations is susceptible to adverse economic and underwriting conditions.
Note: Plus (+) and minus (-) signs indicate relative standing within a category,
and are not indications of likely upgrades or downgrades.
DESCRIPTION OF MOODY'S RATINGS OF INSURANCE COMPANY CLAIMS-PAYING ABILITY
AAA. Insurance companies rated Aaa offer exceptional financial security. While
the financial strength of these companies is likely to change, such changes as
can be visualized are most unlikely to impair their fundamentally strong
position.
AA. Insurance companies rated Aa offer excellent financial security. Together
with the Aaa group they constitute what are generally known as high grade
companies. They are rated lower than Aaa companies because long-term risks
appear somewhat larger.
A. Insurance companies rated A offer good financial security. However,
elements may be present which suggest a susceptibility to impairment sometime in
the future.
BAA. Insurance companies rated Baa offer adequate financial security. However,
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time.
Note: Numeric modifiers are used to refer to the ranking within the group -- one
being the highest and three being the lowest. However, the financial strength of
companies within a generic rating symbol (Aa, for example) is broadly the same.
B-23
<PAGE> 693
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.
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.
</TABLE>
B-24
<PAGE> 694
<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
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-25
<PAGE> 695
<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-26
<PAGE> 696
<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-27
<PAGE> 697
<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-28
<PAGE> 698
<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-29
<PAGE> 699
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-30
<PAGE> 700
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 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>
Lawrence J & Joan A Lyng Tr.............................. 1,991 C 7.55%
Lawrence J Lyng Rev TR
04/12/1995
1085 Samar Road
Cocoa Beach, FL 32931-3070
Prudential Securities Inc. FBO........................... 2,730 C 10.36%
Erna Schnellman TTEE
Erna Schnellman Trust
UA DTD 04/26/91
126 East Banyan Drive
Fort Myers, FL 33908-3819
Thomas J. Sheehan III &.................................. 6,758 C 25.64%
Carolyn L. Sheehan &
Thomas J. Sheehan JT TEN
2136 New Bedford Drive
Sun City Ctr, FL 33573-6161
PaineWebber for the Benefit of .......................... 7,040 C 26.71%
Sheila A. Rimer
6 Riverview Dr.
Stuart, FL 34996-6313
</TABLE>
B-31
<PAGE> 701
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. 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, which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is controlled, through the ownership of a substantial majority of its common
stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York based private investment firm. The General
Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership
("C&D Associates L.P."). The general partners of C&D Associates L.P., are Joseph
L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J.
Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of Van Kampen American Capital 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 between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase. 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 agreement will continue in effect from year to year if specifically
approved by the Trustees of the Trust, of which the Fund is a separate series
(or by the Fund's shareholders), and by the disinterested trustees in compliance
with the requirements of the 1940 Act. The agreement may be terminated without
penalty upon 60 days' written notice by either party 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 and 1994, the Fund paid advisory
expenses of $0 and $0, 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
B-32
<PAGE> 702
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 and 1994 the Fund paid expenses of
approximately $0 and $4,680, respectively, representing the Distributor's cost
of providing certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.
For the years ended December 31, 1995 and 1994 the Fund paid expenses of
approximately $0 and $942, respectively, representing the 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 fund's minute books and records, preparation and oversight of
the fund's regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the years ended December 31, 1995 and 1994 the Fund paid expenses of
approximately $0 and $0, 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. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and
B-33
<PAGE> 703
may select firms that are affiliated with the Fund, the Adviser, or its
distributor and other principal underwriters.
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 service
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the 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 to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or 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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1995 federal individual income tax rates in effect on the date of this
Statement of Additional Information, including the 36% and 39.6% rates enacted
in August 1993 as part of the Revenue Reconciliation Act of 1993.
The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.3% taxable yield at
current federal income tax rates to receive the same benefit.
The State of Florida imposes no income tax on individuals; accordingly, the
table reflects only the exemption from Federal income taxes. The table does not
reflect the exemption of shares of the Fund from the
B-34
<PAGE> 704
State's intangible tax; accordingly, Florida residents subject to such tax would
need a somewhat higher taxable return than those shown to equal the tax-exempt
return of the Florida Fund.
1995 FEDERAL TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX ------------------------------------------------------------------------------
RETURN RETURN BRACKET 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- --------------- --------------- ------- ---- ---- ---- ---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,000 $ 0-40,100 15.00% 3.53% 4.12% 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
24,000-58,150 40,100-96,900 28.00% 4.17 4.86 5.56 6.25 6.94 7.64 8.33 9.03 9.72
58,150-121,300 96,900-147,700 31.00% 4.35 5.07 5.80 6.52 7.25 7.97 8.70 9.42 10.14
121,300-263,750 147,700-263,750 36.00% 4.69 5.47 6.25 7.03 7.81 8.59 9.38 10.16 10.94
Over 263,750 Over 263,750 39.60% 4.97 5.79 6.62 7.45 8.28 9.11 9.93 10.76 11.59
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX -------------
RETURN RETURN BRACKET 7.5% 8.0%
- --------------- --------------- ------- ----- -----
<S> <C> <C> <C> <C>
$ 0-24,000 $ 0-40,100 15.00% 8.82% 9.41%
24,000-58,150 40,100-96,900 28.00% 10.42 11.11
58,150-121,300 96,900-147,700 31.00% 10.87 11.59
121,300-263,750 147,700-263,750 36.00% 11.72 12.50
Over 263,750 Over 263,750 39.60% 12.42 13.25
</TABLE>
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 continuously through Van Kampen American
Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Van Kampen American Capital Distributors, Inc. is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of VK/AC
Holding, Inc., a Delaware corporation that is controlled through an ownership of
a substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C & D L.P."), a Connecticut limited
partnership. In addition, certain officers, directors and employees of Van
Kampen American Capital, Inc., and its subsidiaries own, in the aggregate not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 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
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 acting as
securities dealers and NASD members or eligible non-members acting as brokers or
agents and similar agreements between the Fund and financial intermediaries
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."
B-35
<PAGE> 705
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 $29,119, $135,169 and $629 for the Class A Shares, Class B Shares, and
Class C Shares, respectively, of which $5,385 and $7,144 represent payments to
financial intermediaries under the Selling Agreements for Class A Shares and
Class B Shares, respectively. For the year ended December 31, 1995, the Fund has
reimbursed the Distributor $0 and $0 for advertising expenses, and $0 and $0 for
compensation of the Distributor's sales personnel for the Class A Shares and
Class B Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund are Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois and Squire, Sanders & Dempsey of Jacksonville, Florida.
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
seven 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 4.00% and 1.00%, 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
B-36
<PAGE> 706
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 non-standardized 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,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.
CLASS A SHARES
The average annualized total return, including payment of the sales charge,
with respect to the Class A Shares for (i) the one year period ended December
31, 1995 was 10.77% and (ii) the approximately one year, five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1995 was 6.38%.
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 4.93%. The tax-equivalent 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" and assuming a 36% tax rate) was 7.70%. 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 5.00%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to December 31, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 9.16%.
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
December 31, 1995 was 14.58%.
CLASS B SHARES
The average annualized 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 11.53% and (ii) the approximately one year, five month
B-37
<PAGE> 707
period of July 29, 1994 (commencement of investment operations of the Fund)
through December 31, 1995 was 6.75%.
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 4.41%. The tax-equivalent 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" and assuming a 36% tax rate) was 6.89%. 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 4.55%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 9.69%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
was 13.44%.
CLASS C SHARES
The average annualized 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 14.61% and (ii) the approximately one year, five month period from July
29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1995 was 9.36%.
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 4.41%. The tax-equivalent 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" and assuming a 36% tax rate) was 6.89%. 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 4.54%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 13.52%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
was 13.52%.
B-38
<PAGE> 708
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen American Capital Florida Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Florida Insured Tax Free Income Fund (the "Fund"),
including the portfolio of investments, as of December 31, 1995, the related
statement of operations for the year then ended, and the statement of changes
in net assets and financial highlights for the year then ended and for the
period July 29, 1994 (commencement of investment operations) through December
31, 1994. 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 Florida Insured Tax Free Income Fund as of December 31,
1995, the results of its operations for the year then ended, and the changes in
its net assets and financial highlights for the year then ended and for the
period July 29, 1994 (commencement of investment operations) through December
31, 1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 13, 1996
B-39
<PAGE> 709
<TABLE>
<CAPTION>
Portfolio of Investments
December 31, 1995
- --------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
Florida 80.5%
$ 900 Brevard Cnty, FL Hsg Fin Auth Single Family Mtg Rev
(GNMA Collateralized) .................................. 6.650% 09/01/21 $ 940,320
650 Brevard Cnty, FL Sales Tax Rev (MBIA Insd) ............. 5.750 12/01/13 682,292
500 Citrus Cnty, FL Hosp Brd Rev Citrus Mem Hosp Ser A Rfdg
(FSA Insd) ............................................. 6.500 08/15/12 553,080
250 Clay Cnty, FL Hsg Fin Auth Rev Single Family Mtg (GNMA
Collateralized) ........................................ 6.500 09/01/21 259,425
1,155 Dade Cnty, FL Prof Sports Franchise Fac Tax Rev (MBIA
Insd)................................................... * 10/01/22 281,254
980 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA Insd) ..... 5.750 05/01/08 1,028,853
500 Dade Cnty, FL Sch Brd Ctfs Partn Ser A (MBIA Insd) ..... 6.000 05/01/14 528,095
1,000 Dade Cnty, FL Wtr & Swr Syts Rev (FGIC Insd)............ 5.500 10/01/25 1,008,960
900 Daytona Beach, FL Wtr & Swr Rev Rfdg (AMBAC Insd)....... 5.750 11/15/10 944,244
600 Escambia Cnty, FL Pollutn Ctl Rev Champion Intl Corp
Proj ................................................... 6.900 08/01/22 649,662
1,400 Florida St Brd Edl Cap Outlay Pub Edl Ser B <F2> ....... 5.875 06/01/24 1,443,960
900 Florida St Brd Edl Cap Outlay Pub Edl Ser C............. 6.625 06/01/22 995,661
500 Hillsborough Cnty, FL Hosp Auth Hosp Rev Tampa Genl
Hosp Proj Rfdg (FSA Insd) .............................. 6.375 10/01/13 542,965
750 Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl Rev
Tampa Elec Co Proj Rfdg (MBIA Insd)..................... 6.250 12/01/34 810,735
750 Hillsborough Cnty, FL Port Dist Rev Tampa Port Auth Ser
B Rfdg (FSA Insd)....................................... 5.400 06/01/07 785,483
1,000 Jacksonville, FL Elec Auth Rev Saint Johns Pwr-2 Ser 7
Rfdg (MBIA Insd) <F3>................................... 5.500 10/01/14 1,020,460
700 Jacksonville, FL Hlth Fac Auth Hosp Rev Baptist Med
Cent Proj Ser A Rfdg (MBIA Insd) <F3>................... 7.300 06/01/19 776,461
1,000 Jacksonville, FL Wtr & Swr Rev United Wtr Proj (AMBAC
Insd)................................................... 6.350 08/01/25 1,085,930
890 Martin Cnty, FL Cons Util Sys Rev Rfdg & Impt (FGIC
Insd) .................................................. 5.750 10/01/08 948,366
750 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown
Cogeneration Proj A Rfdg ............................... 7.875 12/15/25 864,533
545 Melbourne, FL Arpt Rev Rfdg (MBIA Insd) <F2>............ 6.250 10/01/18 585,973
500 Miramar, FL Wastewtr Impt Assmt Rev (FGIC Insd) ........ 6.750 10/01/25 570,165
250 Orange Cnty, FL Hlth Fac Auth Rev Pooled Hosp Ln Ser B
Rfdg (BIGI Insd) ....................................... 7.875 12/01/25 267,670
1,000 Orange Cnty, FL Hsg Fin Auth Single Family Mtg Rev
(GNMA Collateralized) .................................. 6.550 10/01/21 1,039,440
900 Orange Cnty, FL Tourist Dev Tax Rev Ser B (AMBAC Insd)
........................................................ 6.500 10/01/19 990,756
</TABLE>
B-40
<PAGE> 710
<TABLE>
<CAPTION>
Portfolio of Investments
December 31, 1995
- ----------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Florida (Continued)
$ 1,000 Osceola Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC
Insd).............................................. 5.500% 06/01/19 $ 1,011,290
1,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A
(AMBAC Insd)....................................... 5.375 08/01/15 1,003,370
750 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A
(AMBAC Insd) ...................................... 6.375 08/01/15 822,030
500 Saint Petersburg, FL Prof Sports Fac Sales Tax
Rev(MBIA Insd)..................................... 5.625 10/01/20 508,430
750 Sarasota Cnty, FL Util Sys Rev (FGIC Insd) ........ 6.500 10/01/14 837,225
760 Seacoast, FL Util Auth Wtr & Swr Util Sys Rev Rfdg
(FGIC Insd) ....................................... 5.500 03/01/10 780,079
1,000 South Miami, FL Hlth Fac Baptist Hlth Sys Oblig
Group Rfdg (MBIA Insd)............................. 5.375 10/01/11 1,015,600
1,000 Tampa, FL Rev Allegany Hlth Sys Saint Mary's
(MBIA Insd)........................................ 5.125 12/01/23 962,620
500 Volusia Cnty, FL Hlth Fac Auth Rev Hosp Fac Mem
Hlth Rfdg & Impt (AMBAC Insd) ..................... 5.750 11/15/13 524,075
------------
27,069,462
------------
Puerto Rico 7.6%
600 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev
Ser V Rfdg ........................................ 6.375 07/01/07 649,254
670 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser V
Rfdg .............................................. 6.625 07/01/12 731,848
500 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev Ser X
Rfdg .............................................. 5.500 07/01/19 495,765
650 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd) ............................. 5.750 07/01/15 668,440
------------
2,545,307
------------
Total Long-Term Investments 88.1%
(Cost $27,608,096) <F1>........................................................ 29,614,769
------------
Short-Term Investments at Amortized Cost 5.4%
Hillsborough Cnty, FL Indl Dev Auth Pollutn Ctl Rev Tampa Elec Co Gannon Rfdg
($400,000 par, yielding 6.00%, maturing 01/02/96).............................. 400,000
Pinellas Cnty, FL Hlth Fac Dates Pooled Hosp Ln Pgm Rfdg ($1,400,000 par,
yielding 5.95%, maturing 01/02/96)............................................ 1,400,000
------------
Total Short-Term Investments at Amortized Cost.................................. 1,800,000
Other Assets in Excess of Liabilities 6.5%..................................... 2,195,971
------------
Net Assets 100%................................................................ $ 33,610,740
=============
*Zero coupon bond
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is $27,608,096;
the aggregate gross unrealized appreciation is $2,006,673 and the
aggregate gross unrealized depreciation is $-0-, resulting in net
unrealized appreciation of $2,006,673.
<F2> Securities purchased on a when issued or delayed delivery basis.
<F3> Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 711
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
December 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $27,608,096) (Note 1).............................. $ 29,614,769
Short-Term Investments (Note 1)....................................................... 1,800,000
Cash.................................................................................. 3,359,309
Receivables:
Fund Shares Sold.................................................................... 543,688
Interest............................................................................ 418,934
Unamortized Organizational Expenses (Note 1).......................................... 85,760
--------------
Total Assets........................................................................ 35,822,460
--------------
Liabilities:
Payables:
Investments Purchased............................................................... 2,007,831
Income Distributions................................................................ 74,991
Organizational Expenses (Note 1).................................................... 50,430
Accrued Expenses...................................................................... 78,468
--------------
Total Liabilities................................................................... 2,211,720
--------------
Net Assets............................................................................ $ 33,610,740
==============
Net Assets Consist of:
Capital (Note 3)...................................................................... $ 31,876,000
Net Unrealized Appreciation on Investments............................................ 2,006,673
Accumulated Distributions in Excess of Net Investment Income.......................... (11,977)
Accumulated Net Realized Loss on Investments.......................................... (259,956)
--------------
Net Assets............................................................................ $ 33,610,740
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $16,205,600
and 1,065,925 shares of capital stock issued and outstanding) (Note 3)................ $ 15.20
Maximum sales charge (4.75%* of offering price)....................................... .76
--------------
Maximum offering price to public...................................................... $ 15.96
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $16,943,301
and 1,114,583 shares of capital stock issued and outstanding) (Note 3)................ $ 15.20
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $461,839 and
30,359 shares of capital stock issued and outstanding) (Note 3)....................... $ 15.21
==============
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 712
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest............................................................................ $ 1,395,255
--------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$29,119, $135,169 and $629, respectively) (Note 6).................................. 164,917
Investment Advisory Fee (Note 2).................................................... 121,439
Custodian (Note 1).................................................................. 46,421
Shareholder Services (Note 2)....................................................... 39,103
Printing............................................................................ 35,955
Trustees Fees and Expenses (Note 2)................................................. 30,169
Amortization of Organizational Expenses (Note 1).................................... 23,988
Legal (Note 2)...................................................................... 11,125
Other............................................................................... 31,352
--------------
Total Expenses.................................................................... 504,469
Less: Fees Waived and Expenses Reimbursed ($121,439 and $183,980, respectively)... 305,419
Earnings Credits on Cash Balances (Note 1)........................................ 5,509
--------------
Net Expenses...................................................................... 193,541
--------------
Net Investment Income............................................................... $ 1,201,714
==============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................... $ 9,406,707
Cost of Securities Sold........................................................... (9,551,274)
--------------
Net Realized Loss on Investments (Including realized loss on futures transactions
of $357,995)........................................................................ (144,567)
--------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period........................................................... (443,602)
End of the Period................................................................. 2,006,673
--------------
Net Unrealized Appreciation on Investments During the Period........................ 2,450,275
--------------
Net Realized and Unrealized Gain on Investments..................................... $ 2,305,708
==============
Net Increase in Net Assets from Operations.......................................... $ 3,507,422
==============
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 713
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1995
and the Period July 29, 1994 (Commencement of Investment Operations)
to December 31, 1994
- --------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................. $ 1,201,714 $ 304,664
Net Realized Loss on Investments.................................. (144,567) (115,389)
Net Unrealized Appreciation/Depreciation on Investments During
the Period........................................................ 2,450,275 (443,602)
----------------- -----------------
Change in Net Assets from Operations ............................. 3,507,422 (254,327)
----------------- -----------------
Distributions from Net Investment Income.......................... (1,204,444) (301,934)
Distribution in Excess of Net Investment Income (Note 1).......... (11,977) -0
----------------- -----------------
Distributions from and in Excess of Net Investment Income*........ (1,216,421) (301,934)
----------------- -----------------
Net Change in Net Assets from Investment Activities............... 2,291,001 (556,261)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold......................................... 17,861,887 21,222,360
Net Asset Value of Shares Issued Through Dividend Reinvestment.... 447,813 90,281
Cost of Shares Repurchased........................................ (6,892,964) (857,667)
----------------- -----------------
Net Change in Net Assets from Capital Transactions ............... 11,416,736 20,454,974
----------------- -----------------
Total Increase in Net Assets...................................... 13,707,737 19,898,713
Net Assets:
Beginning of the Period........................................... 19,903,003 4,290
----------------- -----------------
End of the Period (Including undistributed net investment income
of $(11,977) and $2,730, respectively)............................ $ 33,610,740 $ 19,903,003
================= =================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period 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.... $ (578,890) $ (128,551)
Class B Shares.... (634,695) (173,186)
Class C Shares.... (2,836) (197)
--------------- -------------
$ (1,216,421) $ (301,934)
=============== =============
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 714
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------------------------------
July 29, 1994
(Commencement
of Investment
Year Ended Operations) to
Class A Shares December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period ....................... $ 13.796 $ 14.300
----------------- -----------------
Net Investment Income........................................... .789 .291
Net Realized and Unrealized Gain/Loss on Investments............ 1.416 (.507)
----------------- -----------------
Total from Investment Operations................................ 2.205 (.216)
Less Distributions from and in Excess of Net Investment Income
(Note 1)........................................................ .798 .288
----------------- -----------------
Net Asset Value, End of the Period.............................. $ 15.203 $ 13.796
================= =================
Total Return*................................................... 16.29% (1.47%)**
Net Assets at End of the Period (In millions)................... $ 16.2 $ 9.0
Ratio of Expenses to Average Net
Assets* <F1>.................................................... .44% .49%
Ratio of Net Investment Income to
Average Net Assets*............................................. 5.33% 5.13%
Portfolio Turnover.............................................. 41.10% 19.30%
*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 <F1>.................... 1.70% 1.99%
Ratio of Net Investment Income to
Average Net Assets.............................................. 4.07% 3.64%
**Non-Annualized
<FN>
<F1> Beginning with the year ended December 31, 1995, the Ratios of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances. (Note 1)
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 715
<TABLE>
<CAPTION>
Financial Highlights (Continued)
- ------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------------------------------
July 29, 1994
(Commencement
of Investment
Year Ended Operations) to
Class B Shares December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period ....................... $ 13.792 $ 14.300
----------------- -----------------
Net Investment Income........................................... .685 .251
Net Realized and Unrealized Gain/Loss on Investments............ 1.415 (.509)
----------------- -----------------
Total from Investment Operations................................ 2.100 (.258)
Less Distributions from and in Excess of
Net Investment Income (Note 1).................................. .691 .250
----------------- -----------------
Net Asset Value, End of the Period.............................. $ 15.201 $ 13.792
================= =================
Total Return*................................................... 15.53% (1.81%)**
Net Assets at End of the Period (In millions)................... $ 16.9 $ 10.9
Ratio of Expenses to Average Net
Assets* <F1>.................................................... 1.12% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............................................. 4.66% 4.31%
Portfolio Turnover.............................................. 41.10% 19.30%
*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 <F1>.................... 2.38% 2.75%
Ratio of Net Investment Income to
Average Net Assets.............................................. 3.40% 2.81%
**Non-Annualized
<FN>
<F1> Beginning with the year ended December 31, 1995, the Ratios of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances. (Note 1)
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 716
<TABLE>
<CAPTION>
Financial Highlights (Continued)
- ------------------------------------------------------------------------------------------------------
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------------------------------
July 29, 1994
(Commencement
of Investment
Operations) to
Year Ended Class C Shares
Class C Shares December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period ....................... $ 13.786 $ 14.300
----------------- -----------------
Net Investment Income........................................... .690 .249
Net Realized and Unrealized Gain/Loss on Investments............ 1.428 (.513)
----------------- -----------------
Total from Investment Operations................................ 2.118 (.264)
Less Distributions from and in Excess of
Net Investment Income (Note 1).................................. .691 .250
----------------- -----------------
Net Asset Value, End of the Period.............................. $ 15.213 $ 13.786
================= =================
Total Return*................................................... 15.61% (1.81%)**
Net Assets at End of the Period (In thousands).................. $ 461.8 $ 11.4
Ratio of Expenses to Average Net
Assets* <F1>.................................................... 1.13% 1.26%
Ratio of Net Investment Income to
Average Net Assets*............................................. 4.51% 4.28%
Portfolio Turnover.............................................. 41.10% 19.30%
*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 <F1>.................... 2.39% 2.74%
Ratio of Net Investment Income to
Average Net Assets.............................................. 3.25% 2.81%
**Non-Annualized
<FN>
<F1> Beginning with the year ended December 31, 1995, the Ratios of Expenses to
Average Net Assets are based upon expense amounts which do not reflect
credits earned on overnight cash balances. (Note 1)
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 717
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital Florida Insured Tax Free 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 non-diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's investment objective is to provide investors a high level of
current income exempt from federal income and Florida state intangibles taxes,
consistent with preservation of capital. Under normal market conditions, the
Fund will invest at least 80% of its assets in insured Florida municipal
securities. The Fund commenced investment operations on July 29, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" 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 on securities
purchased are amortized over the expected life of each applicable security.
During the year ended December 31, 1995, the Fund's custody fee was reduced by
approximately $5,500 as a result of credits earned on overnight cash balances.
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.
B-48
<PAGE> 718
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
D. Organizational Expenses-The Fund will reimburse 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 $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
July 28, 1999. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by VKAC are redeemed during the amortization period, the
Fund will be reimbursed for any unamortized organizational expenses in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1995, the Fund had an accumulated capital loss
carryforward for tax purposes of $259,956, of which $41,580 and $218,376 will
expire on December 31, 2002 and 2003, respectively. Net realized gains or
losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.
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. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and federal income tax
purposes, 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.
B-49
<PAGE> 719
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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..... .500 of 1%
Over $500 million...... .450 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 incurred expenses of
approximately $13,700 representing VKAC's cost of providing accounting, cash
management, legal and certain shareholder services to the Fund. All of these
expenses were waived by VKAC.
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 incurred expenses of approximately $3,900,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit, all of which was assumed by VKAC.
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 $11,400.
At December 31, 1995, VKAC owned 100 shares each of Classes A, B and C.
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.
B-50
<PAGE> 720
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1995, capital aggregated $15,378,255, $16,043,043 and $454,702
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....................... 638,004 $ 9,423,423
Class B....................... 543,226 7,996,321
Class C....................... 29,482 442,143
---------- ---------------
Total Sales................... 1,210,712 $ 17,861,887
========== ===============
Dividend Reinvestment:
Class A....................... 13,418 $ 197,470
Class B....................... 16,884 248,162
Class C....................... 147 2,181
---------- ---------------
Total Dividend Reinvestment... 30,449 $ 447,813
========== ===============
Repurchases:
Class A....................... (240,707) $ (3,477,451)
Class B....................... (232,380) (3,414,090)
Class C....................... (96) (1,423)
---------- ---------------
Total Repurchases............. (473,183) $ (6,892,964)
========== ===============
</TABLE>
B-51
<PAGE> 721
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1994, capital aggregated $9,234,813, $11,212,650 and $11,801
for Classes A, B and C, respectively. For the period ended December 31, 1994,
transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 670,002 $ 9,435,244
Class B....................... 827,493 11,776,916
Class C....................... 713 10,200
--------- -------------
Total Sales................... 1,498,208 $ 21,222,360
========= =============
Dividend Reinvestment:
Class A....................... 2,618 $ 36,073
Class B....................... 3,917 54,037
Class C....................... 13 171
--------- -------------
Total Dividend Reinvestment... 6,548 $ 90,281
========= =============
Repurchases:
Class A....................... (17,510) $ (237,934)
Class B....................... (44,657) (619,733)
Class C....................... -0- -0-
--------- -------------
Total Repurchases............. (62,167) $ (857,667)
========= =============
</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>
B-52
<PAGE> 722
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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
$31,800 and CDSC on the redeemed shares of Classes B and C of approximately
$73,100. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $18,477,597 and
$9,551,274, 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 utilizes futures contracts to manage the portfolio's
effective maturity or duration.
A futures contract is an agreement involving the delivery of a particular
asset on a specified future date at an agreed upon price. The Fund generally
invests in futures on U.S. Treasury Bonds and the Municipal Bond Index and
typically closes the contract prior to the delivery date.
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts
- -----------------------------------------------
<S> <C>
Outstanding at December 31, 1994.... 25
Futures Opened...................... 25
Futures Closed...................... (50)
---------
Outstanding at December 31, 1995.... -0-
=========
</TABLE>
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% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $100,400.
B-53
<PAGE> 723
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
Van Kampen American Capital New Jersey Tax Free Income Fund, formerly known as
Van Kampen Merritt New Jersey Tax Free Income Fund (the "Fund"), seeks to
provide investors with high current income exempt from federal income tax and
New Jersey gross income tax, consistent with preservation of capital. The Fund
is designed for investors who are residents of New Jersey for tax purposes.
Under normal market conditions, the Fund attempts to achieve its investment
objective by investing at least 80% of its assets in a portfolio of New Jersey
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poors Ratings Group ("S&P"), Baa or higher by Moody's Investors Service, Inc.
("Moody's") or an equivalent rating by another nationally recognized statistical
rating organization ("NRSRO"). Up to 20% of the Fund's total assets may consist
of New Jersey municipal securities rated below investment grade (but not rated
lower than B- by S&P, B3 by Moody's or an equivalent rating by another NRSRO)
and unrated New Jersey municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
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>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Description of Municipal Securities Ratings.......................................... B-14
Trustees and Officers................................................................ B-19
Investment Advisory and Other Services............................................... B-27
Custodian and Independent Auditors................................................... B-29
Portfolio Transactions and Brokerage Allocation...................................... B-29
Tax Status of the Fund............................................................... B-30
The Distributor...................................................................... B-30
Legal Counsel........................................................................ B-32
Performance Information.............................................................. B-32
Appendix A -- Special Considerations Relating to New Jersey Municipal Securities..... B-35
Independent Auditors' Report......................................................... B-56
Financial Statements................................................................. B-57
Notes to Financial Statements........................................................ B-66
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 724
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end non-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 Municipal Income Fund, Van Kampen American
Capital Intermediate Term Municipal Income Fund, Van Kampen American Capital
California Insured Tax Free Fund, Van Kampen American Capital New York Tax Free
Income Fund and Van Kampen American Capital Florida Insured Tax Free Income Fund
have been organized as series of the Trust and have commenced investment
operations. Van Kampen American Capital California Tax Free Income Fund, Van
Kampen American Capital Michigan Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax
Free Income Fund have been organized as series of the Trust but have not
commenced investment operations. Other series may be organized and offered in
the future.
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated as of May 10, 1995. 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. The Trust can
issue an unlimited number of shares, $0.01 par value (prior to July 31, 1995,
the shares had no par value). 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 in 1994 under the name Van Kampen Merritt New Jersey Tax
Free Income Fund as a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust. 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. Invest more than 25% of its assets in a single industry; however, 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
B-2
<PAGE> 725
bond market; however, the Fund will not invest more than 25% of its
assets in industrial development bonds in a single industry.
2. 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.
3. 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.
4. 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.
5. 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. 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.
7. 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.
8. 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.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
10. 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 that Strategic Transactions the Fund
may engage in 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 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.
B-3
<PAGE> 726
These investment restrictions are subject to provisions of applicable New
Jersey tax law. Thus, under current New Jersey tax law, the Fund must not hold
any investments in real estate or commodities to qualify as a "qualified
investment fund". See the Prospectus under the caption "Tax Status -- New Jersey
Taxation."
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 200%.
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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. 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 an assignment of the
lessee's interest in the leased property, management and/or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment and would
adversely affect the Fund's status as a "qualified investment fund" under New
Jersey tax law. 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. The Fund will invest in lease
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obligations which contain non-appropriation clauses only if such obligations are
rated investment grade, at the time of investment.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% 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. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund, and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Inverse floaters 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 inverse floaters in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid and would adversely affect the Fund's status as a
"qualified investment fund" under New Jersey tax law.
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.
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
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<PAGE> 728
such securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund and would adversely affect the Fund's
status as a "qualified investment fund" under New Jersey tax law. 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. Further, in connection with the working out or restructuring of a
defaulted security, the Fund may acquire additional securities of the issuer,
the acquisition of which may be deemed to be a loan of money or property. Such
additional securities should be considered speculative with respect to the
capacity to pay interest or repay principal in accordance with their terms.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, 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. The Fund's policy
with respect to investment in illiquid and restricted securities is not a
fundamental policy and may be changed by the Board of Trustees, in consultation
with the Adviser, without obtaining shareholder approval.
LOWER GRADE MUNICIPAL SECURITIES
In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade municipal securities and up to 20% of the Fund's
total assets may be invested in lower grade 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 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 municipal securities is considered generally to be less
liquid than the market for investment grade 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
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<PAGE> 729
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 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
municipal securities and adversely affect the market value of such securities.
In addition, in such circumstances, the ability of issuers of lower grade
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 such
securities and adversely affect the value of the lower grade municipal
securities in the Fund's portfolio and thus the Fund's net asset value. The
secondary market prices of lower grade municipal securities are less sensitive
to changes in interest rates than are those for higher rated 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 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 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 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 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, Moody's or another NRSRO in evaluating 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 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,
below B3 by Moody's or an equivalent rating by another NRSRO, or whose rating
has been withdrawn.
Because issuers of lower grade 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
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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.
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES
Investors should be aware of certain factors that might affect the financial
condition of issuers of New Jersey municipal securities. New Jersey's economic
base is diversified, consisting of a variety of manufacturing, construction and
service industries, supplemented by rural areas with selective commercial
agriculture. By the beginning of the national recession in 1990, construction
activity had already been declining in New Jersey for nearly two years. The
onset of recession caused an acceleration of New Jersey's job losses in
construction and manufacturing, as well as an employment downturn in such
previously growing sectors as wholesale trade, retail trade, finance, utilities
and trucking and warehousing. Reflecting the downturn, the rate of unemployment
in the State rose from a peacetime low of 3.6% during the first quarter of 1989
to a recessionary peak of 8.4% during 1992. Since then, the unemployment rate
fell to an average of 6.4% during the first ten months of 1995.
More detailed information concerning New Jersey municipal securities and the
State of New Jersey is included in Appendix A of the Statement of Additional
Information.
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. Under current New Jersey tax law, the Fund may not
hold any investments other than interest-bearing obligations, obligations issued
at a discount and cash and cash items, including receivables and financial
options, futures, forward contracts or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto. See the Prospectus under the caption "Tax Status
- -- New Jersey Taxation."
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions"). Under
current New Jersey tax law, the Fund may purchase and sell exchange-listed and
over-the-counter put and call options and purchase and sell financial futures.
See the Prospectus under the caption "Tax Status -- New Jersey Taxation." The
Fund also reserves the right to engage in swaps, caps, floors or collars.
However, current New Jersey tax law may limit the Fund's ability to engage in
such 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,
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techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such 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
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<PAGE> 732
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 NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the
B-10
<PAGE> 733
Fund, the Fund may be required to acquire the underlying security at a
disadvantageous price in order to satisfy its obligation with respect to the
call option.
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) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on financial 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 financial 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
B-11
<PAGE> 734
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. If permitted under applicable New Jersey tax law, 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, if permitted under applicable New Jersey tax
law. The Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio, as a
duration management technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. The Fund intends to
use these transactions as hedges and not as speculative investments and will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them.
B-12
<PAGE> 735
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.
B-13
<PAGE> 736
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 as having as predominantly
B speculative characteristics with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
</TABLE>
B-14
<PAGE> 737
<TABLE>
<S> <C>
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that is
assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which is
assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only on
request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates of
deposit, the letter "L" indicates that the deposit, combined with other deposits
being held in the same right and capacity, will be honored for principal and
accrued pre-default interest up to the federal insurance limits within 30 days
after closing of the insured institution or, in the event that the deposit is
assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of default upon
failure of, such completion. The investor should exercise his own judgement with
respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and cash
flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account currency
exchange and related uncertainties.
</TABLE>
B-15
<PAGE> 738
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 guide"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess very
strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
A commercial paper rating is not a recommendation to purchase or sell a security. The
ratings are based on current information furnished to S&P by the issuer or obtained from
other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as
a result of changes in or unavailability of, such information.
</TABLE>
B-16
<PAGE> 739
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, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
B-17
<PAGE> 740
<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 bonds 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.
B-18
<PAGE> 741
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-19
<PAGE> 742
<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-20
<PAGE> 743
<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-21
<PAGE> 744
<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-22
<PAGE> 745
<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-23
<PAGE> 746
<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-24
<PAGE> 747
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.
B-25
<PAGE> 748
(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 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 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>
Grace G. Tullio.......................................... 29,904 A 6.52%
P.O. Box 672
Ridgewood, NJ 07451-0672
Prudential Securities FBO................................ 36,895 B 6.28%
Edith P.C. Taylor
25 Hickory Place
Apt. D-1
Chatham, NJ 07928-1479
Advest Inc............................................... 3,112 C 6.76%
309-03495-19
90 State House Square
Hartford, CT 06103-3702
</TABLE>
B-26
<PAGE> 749
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER APRIL 10, 1996 SHARES OWNERSHIP
- --------------------------------------------------------- -------------- -------- ---------
<S> <C> <C> <C>
Garden State Cutting..................................... 3,657 C 7.94%
Attn: Vincent Landi
217 Brook Avenue
Passiac, NJ 07055-3338
John H. Schroeder........................................ 3,777 C 8.20%
Carol A. Schroeder JT WROS
20 Byron Drive
Mount Laurel, NJ 08054-4700
Painwebber for the Benefit of Sam Aldenderfer............ 5,320 C 11.55%
3030 Edwin Avenue
Apt. 3B
Fort Lee, NJ 07024-3413
Prudential Securities FBO................................ 6,723 C 14.59%
Dr. Gary Karakashian
c/o Vincent Karakashian
46 Seaview Avenue
Monmouth Beach, NJ 07750-1224
Ilene B. Haym............................................ 6,726 C 14.60%
4521 PGA Blvd. #269
Palm Beach Gardens, FL 33418-3967
Louise I. Grill.......................................... 11,354 C 24.65%
c/o Alvin H. Frankel POA
601 Haddon Avenue
Collingswood, NJ 08108-3703
</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'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, which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc.
is controlled, through the ownership of a substantial majority of its common
stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership
("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton,
Dubilier & Rice, Inc., a New York based private investment firm. The General
Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership
("C&D Associates L.P."). The general partners of C&D Associates L.P., are Joseph
L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J.
Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of
whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain
officers, directors and employees of Van Kampen American Capital 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 between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase. The Adviser also
administers the business affairs of the Fund, furnishes offices, necessary
facilities and
B-27
<PAGE> 750
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 agreement will continue in effect from year to year if specifically
approved by the Trustees of the Trust, of which the Fund is a separate series
(or by the Fund's shareholders), and by the disinterested trustees in compliance
with the requirements of the 1940 Act. The agreement may be terminated without
penalty upon 60 days' written notice by either party 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 year ended December 31, 1995 and the period ended December 31, 1994,
the Fund paid advisory expenses of $0 and $0, respectively.
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT. The Fund has also 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
distributed by the Distributor and advised by the VK Adviser in the cost of
providing such services, with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such cost based proportionally on their respective net assets per fund.
For the year ended December 31, 1995 and the period ended December 31, 1994,
the Fund paid expenses of approximately $0 and $0, respectively, representing
the VK Adviser's cost of providing accounting services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent 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 year ended December 31, 1995 and the period ended December 31, 1994,
the Fund paid expenses of approximately $0 and $0, respectively, representing
the Distributor's cost of providing certain support services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the fund's minute books and records, preparation and oversight of
the fund's regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
B-28
<PAGE> 751
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 year ended December 31, 1995 and the period ended December 31, 1994,
the Fund paid expenses of approximately $0 and $0, 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. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and may select firms that are affiliated with the
Fund, the Adviser, or its distributor and other principal underwriters.
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 service
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the 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 set
forth above to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients 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.
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<PAGE> 752
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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1996 federal and New Jersey State gross income tax rates in effect on the
date of this Statement of Additional Information.
The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately an 8.82% taxable yield at
current federal and state income tax rates to receive the same benefit.
1996 FEDERAL AND NEW JERSEY STATE TAXABLE VS. TAX-FREE YIELDS
<TABLE>
<CAPTION>
SINGLE JOINT MARGINAL
RETURN RETURN TAX RATE* 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
- ---------------- ---------------- --------- ---- ---- ---- ---- ---- ---- ----- ----- -----
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-- 24,000 $ 0-- 40,100 16.49% 3.59% 4.19% 4.79% 5.39% 5.99% 6.59% 7.18% 7.78% 8.38%
24,001-- 58,150 40,101-- 96,900 31.98 4.41 5.15 5.88 6.62 7.35 8.09 8.82 9.56 10.29
58,151-- 75,000 96,901--147,700 34.81 4.60 5.37 6.14 6.90 7.67 8.44 9.20 9.97 10.74
75,001--121,300 -- 35.40 4.64 5.42 6.19 6.97 7.74 8.51 9.29 10.06 10.84
121,301--263,750 147,701--263,750 40.08 5.01 5.84 6.68 7.51 8.34 9.18 10.01 10.85 11.68
Over 263,750 Over 263,750 43.45 5.31 6.19 7.07 7.96 8.84 9.73 10.61 11.49 12.38
<CAPTION>
SINGLE
RETURN 7.5% 8.0%
- ---------------- ----- -----
<S> <<C> <C>
$ 0-- 24,000 8.98% 9.58%
24,001-- 58,150 11.03 11.76
58,151-- 75,000 11.50 12.27
75,001--121,300 11.61 12.38
121,301--263,75 12.52 13.36
Over 263,750 13.25 14.13
</TABLE>
- ---------------
* Combined state and federal tax top marginal rate. The tax rate brackets listed
are the 1996 federal income tax rate brackets. Because New Jersey's gross
income tax utilizes a different set of rate brackets, more than one New Jersey
gross income tax bracket may fall within a particular federal bracket. In
those federal brackets where this is so, the highest marginal New Jersey gross
income tax rate has been used for purposes of the table. This tends to
slightly increase the taxable equivalent estimated current return shown above
for lesser income amounts within certain federal brackets, but not by more
than approximately 0.39% in the chart above.
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
B-30
<PAGE> 753
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 continuously through Van Kampen American
Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois
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 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 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 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."
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 $12,135, $72,539 and $3,252 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $0 and $0 represent payments to financial
intermediaries under the Selling Agreements for Class A Shares and Class B
Shares, respectively. For the year ended December 31, 1995, the Fund reimbursed
the Distributor $0 and $0 for advertising expenses and $0 and $0 for
compensation of the Distributor's sales personnel for Class A Shares and Class B
Shares, respectively.
B-31
<PAGE> 754
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois
and Crummy, Del Deo, Dolan, Griffinger & Vecchione, Newark, New Jersey.
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
seven 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 4.00% and 1.00%, 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
B-32
<PAGE> 755
subsequent given date. Cumulative non-standardized 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, deducting the maximum initial sales charge, if any,
determining the value of all subsequent reinvested distributions, and dividing
the net change in the value of the investment as of the end of the period by the
amount of the initial investment and expressing the result as a percentage.
Non-standardized total return will be calculated separately for each class of
shares. Non-standardized total return calculations do not reflect the imposition
of a contingent deferred sales charge, and if any such contingent deferred sales
charge with respect to the CDSC imposed at the time of redemption were
reflected, it would reduce the performance quoted.
CLASS A SHARES
The average annual total return including payment of the sales charge with
respect to the Class A Shares for (i) the one year period ending December 31,
1995 was 9.78% and (ii) the approximately one year and five month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1995 was 5.45%.
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 4.95%. The tax-equivalent 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" and assuming a 40.2% tax rate) was 8.21%. 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 4.91%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to December 31, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 7.81%.
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
December 31, 1995 was 13.17%.
CLASS B SHARES
The average annual total return including payment of the CDSC with respect to
the Class B Shares for (i) the one year period ending December 31, 1995 was
10.43% and (ii) the approximately one year and five month period of July 29,
1994 (commencement of investment operations of the Fund) through December 31,
1995 was 5.73%.
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 4.44%. The tax-equivalent 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" and assuming a 40.2% tax rate) was 7.42%. 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 4.44%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 8.21%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
was 11.96%.
CLASS C SHARES
The average annual total return including payment of the CDSC with respect to
the Class C Shares for (i) the one year period ending December 31, 1995 was
13.42% and (ii) the approximately one year and five
B-33
<PAGE> 756
month period from July 29, 1994 (the commencement of investment operations of
the Fund) through December 31, 1995 was 8.35%.
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 4.44%. The tax-equivalent 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" and assuming a 40.2% tax rate) was 7.42%. 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 4.44%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 12.03%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
was 12.03%.
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<PAGE> 757
APPENDIX A
SPECIAL CONSIDERATIONS RELATING TO NEW JERSEY MUNICIPAL SECURITIES
As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New Jersey municipal securities. In
addition, the specific New Jersey municipal securities in which the Fund will
invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of New Jersey
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of New Jersey
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of New Jersey municipal
securities may be subject. Such information is derived from the preliminary
official statement utilized in connection with the issuance of the $372,995,000
State of New Jersey General Obligation Bonds Refunding Bonds (Series E) and
$270,000,000 State of New Jersey General Obligation Bonds (Various Purposes)
dated April 24, 1996. Such information has not been independently verified by
the Fund and the Fund assumes no responsibility for the completeness or accuracy
of such information. Additionally, many factors, including national, economic,
social and environmental policies and conditions, which are not within the
control of such issuers, could have an adverse impact on the financial condition
of such issuers. The Fund cannot predict whether or to what extent such factors
or other factors may affect the issuers of New Jersey municipal securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by the Fund to pay interest on or
principal of such securities. The creditworthiness of obligations issued by
local New Jersey issuers may be unrelated to the creditworthiness of obligations
issued by the State of New Jersey and there is no responsibility on the part of
the State of New Jersey to make payments on such local obligations. There may be
specific factors that are applicable in connection with investment in the
obligations of particular issuers located within New Jersey, and it is possible
the Fund will invest in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth below is
intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New Jersey municipal
securities.
The portfolio of the Fund may include municipal securities issued by the State
of New Jersey (the "State"), by its various public bodies (the "Agencies")
and/or by other entities located within the State.
The State and Its Economy
New Jersey is the ninth largest state in population and the fifth smallest in
land area. With an average of 1,062 persons per square mile, it is the most
densely populated of all the states. New Jersey is located at the center of the
megalopolis which extends from Boston to Washington, and which includes over
one-fifth of the country's population. The extensive facilities of the Port
Authority of New York and New Jersey, the Delaware River Port Authority and the
South Jersey Port Corporation across the Delaware River from Philadelphia
augment the air, land and water transportation complex which has influenced much
of the State's economy. This central location in the northeastern corridor, the
transportation and port facilities and proximity to New York City make the State
an attractive location for corporate headquarters and international business
offices. A number of Fortune Magazine's top 500 companies maintain headquarters
or major facilities in New Jersey, and many foreign-owned firms have located
facilities in the State.
The State's economic base is diversified, consisting of a variety of
manufacturing, construction and service industries, supplemented by rural areas
with selective commercial agriculture. New Jersey has the Atlantic seashore on
the east and lakes and mountains in the north and northwest, which provide
recreation for residents as well as for out-of-state visitors. In 1976, voters
approved casino gambling for Atlantic City, which has again become an important
State tourist attraction.
New Jersey's population grew rapidly in the years following World War II,
before slowing to an annual rate of 0.27 percent in the 1970s. Between 1980 and
1990, the annual growth rose to 0.49 percent and between 1990 and 1994,
accelerated to .52%. While this rate of growth is less than that for the United
States, it compares favorably with other Middle Atlantic States. New York has
shown a 0.23 percent annual rate of increase since 1990 and Pennsylvania's
population has increased 0.33 percent per year.
B-35
<PAGE> 758
The small increase in the State's total population during the past quarter
century masks the redistribution of population within the State. There has been
a significant shift from the northeastern industrial areas toward the four
coastal counties (Cape May, Atlantic, Ocean and Monmouth) and toward the central
New Jersey counties of Hunterdon, Somerset and Middlesex.
Total personal income in New Jersey stood at $210.9 billion for 1993 and
$219.3 billion for 1994, an increase of 4%. Nationally, total personal income
grew by 5.3 percent between 1993 and 1994, while in New York and Pennsylvania it
grew by 3.7 percent and 4.3 percent, respectively. Based on 1973 levels, the
personal income index in 1994 stood at 498.6 for New Jersey, 432.1 for New York
and 441.5 for Pennsylvania. The United States index stood at 517.2 (1973 = 100).
Historically, New Jersey's average per capita income has been well above the
national average. The differential narrowed during the 1970s, widened in the
1980s, and has narrowed slightly in the 1990s. In 1994, the State ranked second
among all states in per capita personal income ($27,742). It ranked higher than
New York, with per capita income of $25,731 and Pennsylvania with $22,195. Only
Connecticut, with $29,044, exceeded New Jersey's $27,742.
After enjoying a boom during the mid-1980s, New Jersey as well as the rest of
the Northeast slipped into a slowdown well before the onset of the national
recession which officially began in July 1990 (according to the National Bureau
of Economic Research). By the beginning of the national recession of 1990-1991,
construction activity had already been declining in New Jersey for nearly two
years, growth had tapered off markedly in the service sectors and the long-term
downward trend of factory employment had accelerated, partly because of a
leveling off of industrial demand nationally. The onset of recession caused an
acceleration of New Jersey's job losses in construction and manufacturing, as
well as an employment downturn in such previously growing sectors as wholesale
trade, retail trade, finance, utilities, trucking and warehousing. The net
effect was a decline in the State's total nonfarm wage and salary employment
from a peak of 3,689,800 in 1989 to a low of 3,445,000 in 1992. This loss was
followed by an employment gain of 176,400 from May 1992 to October 1995, a
recovery of 67% of the jobs lost during the recession. Almost two-thirds of this
number, nearly 117,000 jobs, were recovered in the 21 month period from January
1994 to October 1995.
Reflecting the downturn, the rate of unemployment in the State rose from a low
of 3.6 percent during the first quarter of 1989 to a recessionary peak of 8.4%
during 1992. Since then, the unemployment rate fell to an average of 6.4% during
the first ten months of 1995. Despite an increase reported in December 1995, the
average annualized unemployment rate remained at 6.4% for the fourth quarter of
1995.
For the recovery period as a whole, May 1992 to October 1995, (latest
available), service-producing employment in New Jersey has expanded by 188,300
jobs. Hiring has been reported by food stores, auto dealers, wholesale
distributors, trucking and warehousing firms, utilities, business and
engineering/management service firms, hotels/hotel-casinos, social service
agencies and health care providers other than hospitals. Employment growth was
particularly strong in business services and its personnel supply component with
increases of 14,400 and 5,800, respectively, in the 12-month period ending
October 1995.
The manufacturing sector showed evidence of improvement through 1994. Factory
employment losses slowed between 1992 and 1994, as the plant closings and
layoffs of the recessionary period tapered off and were increasingly
counterbalanced by the expansionary impact of rising industrial demand. After
totaling about 134,000 over the four-year period through the end of 1992 (an
average of 33,500 per year), New Jersey's factory job losses tapered off to
11,100 during 1993 and 5,400 during 1994. During 1995, however, manufacturing
job losses appeared to have accelerated, reflecting a slowdown in national
manufacturing production activity, with an employment loss of 16,600 for the
12-month period ending October 1995. After having enjoyed actual growth in the
number of production workers in 1994, the number of blue-collar workers resumed
their decline in 1995 at the same time that managerial and office staff were
also reduced as part of nationwide downsizing.
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Conditions have slowly improved in the construction industry, where employment
has risen by 21,200 since its low in May 1992. When it began during the late
spring of 1992, this sector's hiring rebound was driven primarily by increased
homebuilding and public work projects. Nonresidential construction activity has
begun to increase in the last two years. Contract awards in this sector posted a
9.7% gain in 1993 and 19.8% in 1994. More recently, nonresidential building
construction contracts increased by 9.0% in the first three quarters of 1995
compared with the same period in 1994.
Residential construction contracts through September 1995, despite monthly
fluctuations, stayed almost even with 1994 ($1,671 million in the first three
quarters of 1995 versus $1,677 million in the same period of 1994). Despite a
7.2% decline in nonbuilding or infrastructure construction, largely due to a
slowing in public construction projects, total construction contracts rose by
1.6% when comparing the first nine months of 1994 and 1995.
Another indicator of economic improvement is increased consumer spending as
evidenced by rising retail sales. While overall retail sales in New Jersey grew
by only 1.5% during 1993, they performed much better in 1994 and continued to
increase, despite some fall off in the winter of 1995. Sales advanced briskly
with retail receipts up 8.1% during 1994 compared with 1993, which was somewhat
higher than the 7.8% growth registered nationwide. Consumer spending was
sluggish during the winter months of 1995 both nationally and in the State.
Statewide sales of retail stores regained momentum in May 1995 and were on a
moderately upward trend through August 1995, resulting in sales growth of 3.1%
when comparing the first eight months of 1994 with those of 1995. The rising
trend in retail sales has translated into steady increases in retail trade jobs
(both full- and part-time) and, in September and October 1995, retail employment
rose by a total of 5,600 jobs.
Total new vehicle registrations (new passenger cars and light trucks and vans)
rose robustly in 1993 by more than 18%, and in 1994 by 5.5%. Through August 1995
however, total new vehicle registrations were down by 2.3% compared to the same
time period in 1994.
Unemployment in the State through October 1995 has been receding. According to
the U.S. Bureau of Labor Statistics, the jobless rate dropped from 7.4% in 1993
to 6.8% in 1994. Subsequently, it has dropped to 6.4% for the three-month period
ending in December 1995. It should be noted that the monthly household survey
upon which these unemployment estimates are based was modified significantly
beginning January 1994, causing a break in the historical series that makes it
difficult to accurately assess current changes in overall labor market
conditions with those that occurred prior to 1994. Before the survey redesign,
however, conditions had already been steadily improving for a year and one-half,
with the State's jobless rate dropping from a high of 9.3% in the summer of 1992
to 6.5% during the fourth quarter of 1993.
The insured unemployment rate, i.e., the number of individuals claiming
benefits as a percentage of the number of workers covered by unemployment
insurance, peaked at 4.2% in October 1991 and remained stable at about 4.0%
through June 1992. It then began a gradual decline, reaching 3.0% in December
1994 and has since stabilized in the range of 3.0% to 3.2%.
ATLANTIC CITY AND LEGALIZED GAMBLING
Legalized casino gambling was introduced into Atlantic City by the enactment
of the Casino Control Act on June 2, 1977 following a public referendum which
passed by a 3-to-2 margin in November 1976. Since passage of that legislation,
thirteen hotel/casinos have opened in Atlantic City. However, on May 22, 1989,
Elsinore's Atlantis Casino Hotel discontinued its casino operations due to its
severe financial difficulties. Consequently, there are twelve casinos currently
operating in Atlantic City.
For the year ended December 31, 1994, eight of the twelve operating casinos
reported a profit. The industry as a whole reported net income of $31.4 million
for the year, reflecting a $32.6 million increase from the net loss of $1.2
million reported for the prior comparable period. For the nine months ended
September 30, 1995, ten of the twelve casinos reported combined net income of
$148.3 million, reflecting a $125.7 million increase from net income of $22.6
million reported for the prior comparable period.
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For the year ended December 31, 1994 and the nine months ended September 30,
1995, the casino industry reported "Win" of $3.4 billion and $2.9 billion,
respectively. "Win" represents the amount a casino wins at the slot machines and
table games before operating expenses and taxes are deducted.
For the year ended December 31, 1994 and the nine months ended September 30,
1995, the State collected revenue taxes for programs to assist the elderly and
disabled of $272.4 million and $227.1 million, respectively. From May 20, 1978,
the date the first casino opened, through September 30, 1995, the industry has
paid a total of $3.1 billion to the State for these programs. As of September
30, 1995, the Casino Revenue Fund has earned $115.3 million in interest.
In 1994 there were 43,400 jobs in the hotel/casinos; total employment in the
Atlantic County metropolitan statistical area has grown from 89,000 persons in
1975 to 165,300 in 1994. The number of visitors to Atlantic City increased 347.1
percent from 7.0 million for 1978 to 31.3 million for 1994.
The gaming industry has also provided substantial revenue for municipal,
county and school governments through real estate taxes and payment of the
luxury tax which the State has authorized and which is applied to hotel tax and
amusement revenues.
NEW JERSEY STATE LOTTERY FINANCIAL DATA
The New Jersey State Lottery was created as a major source of revenue for
State education and institutions. As of June 30, 1995, the Lottery has generated
over $18.1 billion in gross revenues, paid $8.9 billion in prizes and
contributed $7.57 billion to the State.
Higher Education programs have received approximately $2.091 billion in
Lottery funds. For elementary and secondary education, the State Department of
Education has received approximately $1.646 billion. State institutions have
received a total of $3.837 billion in Lottery monies.
In Fiscal Year 1995, gross revenues totalled $1.59 billion, of which 50.88
percent was returned in prizes, 40.72 percent went to State education and
institutions, 7.05 percent was paid to sales agents and ticket vendors and 1.35
percent covered lottery operational and promotional expenses.
STATE FINANCES
The Director of the Division of Budget and Accounting in the Department of
Treasury of the State (the "Budget Director") prescribes and approves the
accounting policies of the State and directs their implementation.
NEW JERSEY'S ACCOUNTING SYSTEM
The State prepares its financial statements on a "modified accrual" basis
utilizing the fund method of accounting. The National Council on Governmental
Accounting in its publication entitled Statement I. -- Governmental Accounting
and Financial Reporting Principles defines a fund as a fiscal and accounting
entity with a self-balancing set of accounts recording cash and other financial
resources together with all related liabilities and residual equities or
balances, and changes therein, which are segregated for the purpose of carrying
on specific activities or attaining certain objectives in accordance with
special regulations, restrictions or limitations. The State's financial
statements reflect financial reporting practices in accordance with that
definition. Accordingly, the State prepares separate statements for the General
Fund, Special Revenue Funds, Debt Service Funds, Capital Project Funds, Trust
and Agency Funds, Component Units--Authorities Funds, College and University
Funds, General Fixed Asset Account Group and its General Long-Term Debt Account
Group, and its component units.
The General Fund is the fund into which all State revenues not otherwise
restricted by statute are deposited and from which appropriations are made. The
largest part of the total financial operations of the State is accounted for in
the General Fund. Revenues received from taxes and unrestricted by statute, most
federal revenue and certain miscellaneous revenue items are recorded in the
General Fund. The appropriations acts provide the basic framework for the
operation of the General Fund.
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Special Revenue Funds are used to account for resources legally restricted to
expenditure for specified purposes. Special Revenue Funds include the Casino
Control Fund, the Casino Revenue Fund, the Gubernatorial Elections Fund and the
Property Tax Relief Fund. Debt Service Funds are used to account for the
accumulation of resources for, and the payment of, principal and redemption
premium, if any, of and interest on general obligation bonds. Capital Project
Funds are used to account for financial resources to be used for the acquisition
or construction of major State capital facilities. Trust and Agency Funds are
used to account for assets held in a trust capacity or as an agent for
individuals, private organizations, other governments and/or other funds. The
General Fixed Asset Account Group accounts for the State's fixed assets acquired
or constructed for general governmental purposes. The General Long-Term Debt
Account Group accounts for the unmatured general long-term liabilities of the
State.
The Property Tax Relief Fund, the largest of the Special Revenue Funds, is
used to account for revenues from the New Jersey Gross Income Tax. Revenues
realized from the Gross Income Tax are dedicated by the State Constitution. All
receipts from taxes levied on personal income of individuals, estates and trusts
must be appropriated exclusively for the purpose of reducing or offsetting
property taxes.
New Jersey's Budget and Appropriation System
The State operates on a fiscal year beginning July 1 and ending June 30. For
example, "Fiscal Year 1997" refers to the State's fiscal year beginning July 1,
1996 and ending June 30, 1997. Pursuant to Article VIII, Section II, par. 2 of
the State Constitution, no money may be drawn from the State Treasury except for
appropriations made by law. In addition, all monies for the support of State
government and all other State purposes, as far as can be ascertained or
reasonably foreseen, must be provided for in one general appropriation law
covering one and the same fiscal year. No general appropriations law or other
law appropriating money for any State purpose shall be enacted if the amount of
money appropriated therein, together with all other prior appropriations made
for the same fiscal year, exceeds the total amount of revenue on hand and
anticipated to be available for such fiscal year, as certified by the Governor.
In addition to the Constitutional provisions, the New Jersey Statutes contain
provisions concerning the budget and appropriation system. On or before October
1 in each year, each Department, Board, Commission, officer, or other Agency of
the State must file with the Budget Director a request for appropriation or
permission to spend specifying all expenditures proposed to be made by such
spending agency during the following fiscal year. The Budget Director then
examines each request and determines the necessity or advisability of the
appropriation request. The Budget Director may hold hearings, open to the
public, during the months of October, November and December and reviews the
budget requests with the agency heads. On or before December 31 of each year or
such other time as the Governor may request, after review and examination, the
Budget Director submits the requests, together with her findings, comments and
recommendations, to the Governor. It is then the responsibility of the Governor
to examine and consider all requests and formulate her budget recommendations.
The Governor's budget message (the "Governor's Budget Message") is then
transmitted on or before the third Tuesday following the first meeting of the
State Legislature in each year, except in the year when a Governor is
inaugurated, when it must be transmitted on or before February 15. The
Governor's Budget Message must embody the proposed complete financial program of
the State government for the next ensuing fiscal year and must set forth in
detail each source of anticipated revenue and the purposes of recommended
expenditures for each spending agency. After a process of legislative committee
review, the budget, in the form of an appropriations bill, must be approved by
the Senate and Assembly and must be submitted to the Governor for review. Upon
such submissions, the Governor may approve the bill, revise the estimate of
anticipated revenues contained therein, delete or reduce appropriation items
contained in the bill through the exercise of her line-item veto power, or veto
the bill in its entirety. Like any gubernatorial veto, such action may be
reversed by a two-thirds vote of each House of the State Legislature. In
addition to anticipated revenues, the appropriations act also provides for the
appropriation of non-budgeted revenue to the extent such revenue may be received
and permits the corresponding increase of appropriation balances from which
expenditures may be made.
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FINANCIAL RESULTS AND PROJECTIONS
AUDIT REPORTS
The State Auditor is directed by statute to "examine and post-audit all the
accounts, reports and statements and make independent verifications of all
assets, liabilities, revenues and expenditures" of the State and its agencies.
The audit reports containing the opinion of the State Auditor are available for
examination and review upon request to the State Treasurer.
FISCAL YEARS 1996 AND 1997 REVENUE ESTIMATES
Sales and Use Tax. The revised estimate as shown in the Governor's Fiscal Year
1997 Budget Message forecasts Sales and Use Tax collections for Fiscal Year 1996
as $4,310.0 million, a 4.3% increase from the Fiscal Year 1995 revenue. The
Fiscal Year 1997 estimate of $4,403.0 million, is a 2.2% increase from the
Fiscal Year 1996 estimate.
Gross Income Tax. The revised estimate as shown in the Governor's Fiscal Year
1997 Budget Message forecasts Gross Income Tax collections for Fiscal Year 1996
of $4.547 million, a 0.2% increase from Fiscal Year 1995 revenue. Included in
the Fiscal Year 1995 revenue is a 5% reduction of personal income tax rates
effective January 1, 1994 and a further 10% reduction of personal income tax
rates effective January 1, 1995 (on joint incomes under $80 thousand). The
estimate for Fiscal Year 1997 as shown in the Governor's Fiscal Year 1997 Budget
Message of $4,610.0 million, is a 1.4% increase from the Fiscal Year 1996
estimate. Included in the Fiscal Year 1996 forecast is the 10% reduction of
personal income tax rates effective January 1, 1995 and a further 15% reduction
of personal income tax rates effective January 1, 1996 (on joint incomes under
$80 thousand).
Corporation Business Tax. The revised estimate as shown in the Governor's
Fiscal Year 1997 Budget Message forecasts Corporation Business Tax collections
for Fiscal Year 1996 as $1,198.0 million, a 10.4% increase from Fiscal Year 1995
revenue. Included in the Corporation Business Tax forecast is a reduction in the
Corporation Business Tax rate from 9.375% to 9.0% of net New Jersey income. The
Fiscal Year 1997 forecast as shown in the Governor's Fiscal Year 1997 Budget
Message of $1,210.0 million, is a 1.0% increase from the Fiscal Year 1996
estimate.
Tax Amnesty Program. The Fiscal Year 1996 revised estimates include an
estimate for a Tax Amnesty program, which has been enacted. It is estimated that
a 90-day tax amnesty will yield $70.0 million.
General Considerations. Estimated receipts from State taxes and revenues,
including the three principal taxes set forth above, are forecasts based on the
best information available at the time of such forecasts. Changes in economic
activity in the State and the nation, consumption of durable goods, corporate
financial performance and other factors that are difficult to predict may result
in actual collections being more or less than forecasted.
Should revenues be less than the amount anticipated in the budget for a fiscal
year, the Governor may, pursuant to statutory authority, prevent any expenditure
under any appropriation. There are additional means by which the Governor may
ensure that the State is operated efficiently and does not incur a deficit. No
supplemental appropriation may be enacted after adoption of an appropriations
act except where there are sufficient revenues on hand or anticipated, as
certified by the Governor, to meet such appropriation. In the past when actual
revenues have been less than the amount anticipated in the budget, the Governor
has exercised her plenary powers leading to, among other actions, implementation
of a hiring freeze for all State departments and the discontinuation of programs
for which appropriations were budgeted but not yet spent.
Pending Litigation. In connection with the Fiscal Year 1996 budget, certain
unions and individual plaintiffs have filed a lawsuit concerning the funding of
certain retirement systems. See "LITIGATION -- New Jersey Education Association
et al. v. State of New Jersey et al."
The State has made appropriations for principal and interest payments for
general obligation bonds for Fiscal Years 1993 through 1996 in the amounts of
$444.3 million, $119.9 million, $103.6 million and $466.3 million, respectively.
The Governor's Fiscal Year 1997 Budget Message for Fiscal Year 1997, includes
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an appropriation in the amount of $463.1 million for principal and interest
payments for general obligation bonds.
PROGRAMS FUNDED UNDER FISCAL YEAR 1996 ADJUSTED APPROPRIATIONS
Of the $16,109.1 million appropriated in Fiscal Year 1996 from the General
Fund, the Property Tax Relief Fund, the Casino Control Fund, the Casino Revenue
Fund and the Gubernatorial Elections Fund, $6,446.8 million (40.0%) is
appropriated for State Aid to Local Governments, $3,745.6 million (23.3%) is
appropriated for Grants-in-Aid, $5,233.3 million (32.5%) for Direct State
Services, $466.3 million (2.9%) for Debt Service on State general obligation
bonds and $217.1 million (1.3%) for Capital Construction.
STATE AID TO LOCAL GOVERNMENTS
State Aid to Local Governments is the largest portion of Fiscal Year 1996
appropriations. In Fiscal Year 1996, $6,446.8 million of the State's
appropriations consist of funds which are distributed to municipalities,
counties and school districts. The largest State Aid appropriations, in the
amount of $4,772.8 million, is provided for local elementary and secondary
education programs. Appropriations to the Department of Community Affairs (DCA)
total $840.2 million in State Aid monies for Fiscal Year 1996. Appropriations to
the State Department of the Treasury total $69.3 million in State Aid monies for
Fiscal Year 1996. Other appropriations of State Aid in Fiscal Year 1996 include:
welfare programs ($467.6 million); aid to county colleges ($128.0 million); and
aid to county mental hospitals ($78.3 million).
DIRECT STATE SERVICES
The second largest portion of appropriations in Fiscal Year 1996 is applied to
Direct State Services which supports the operation of State government's
seventeen departments, the Executive Office, several commissions, the State
Legislature and the Judiciary. In Fiscal Year 1996, appropriations for Direct
State Services aggregate to $5,233.3 million.
$591.4 million is appropriated for programs administered by the State
Department of Human Services. The Department of Labor is appropriated $58.3
million for the administration of programs for workers compensation,
unemployment and disability insurance, manpower development and health safety
inspection. The Department of Health is appropriated $33.6 million for the
prevention and treatment of diseases, alcohol and drug abuse programs,
regulation of health care facilities and the uncompensated care program. $771.2
million is appropriated for the support of nine State colleges, Rutgers
University, the New Jersey Institute of Technology and the University of
Medicine and Dentistry of New Jersey. $848.4 million is appropriated to the
Department of Law and Public Safety (excluding the Division of Juvenile
Services) and the State Department of Corrections. $189.6 million is
appropriated to the Department of Transportation for the various programs it
administers, such as the maintenance and improvement of the State highway system
and the registration and regulation of motor vehicles and licensed drivers.
$185.7 million is appropriated to the State Department of Environmental
Protection for the protection of air, land, water, forest, wildlife and
shellfish resources and for the provision of outdoor recreational facilities.
GRANTS-IN-AID
The third largest portion of appropriations in Fiscal Year 1996 is for
grants-in-aid. These represent payments to individuals or public or private
agencies for benefits to which a recipient is entitled to by law, or for the
provision of services on behalf of the State. The amount appropriated in Fiscal
Year 1996 for grants-in-aid is $3,745.6 million.
$2,687.6 million is appropriated for programs administered by the Department
of Human Services. Of that amount, $1,839.0 million is for medical services
provided under the Medicaid program, $175.3 million is for community programs
for the developmentally disabled, $147.5 million is for community programs for
the mentally ill, $167.6 million is for pharmaceutical assistance to the aged
and disabled, $223.3 million is for grant programs administered by the Division
of Youth and Family Services, $81.2 million is for the Lifeline program, and
$48.7 million is for welfare reform and homeless services.
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$332.0 million is appropriated to the Department of the Treasury for the
Homestead Rebate program, which provides property tax relief to homeowners and
renters. $234.2 million is appropriated to the Department of Transportation for
bus and railroad subsidies.
Debt Service
The primary method for State financing of capital projects is through the sale
of the general obligation bonds of the State. These bonds are backed by the full
faith and credit of the State. State tax revenues and certain other fees are
pledged to meet the principal payments, interest payments and if provided,
redemption premium payments, if any, required to fully pay the bonds. The
appropriation for the debt service obligation on outstanding indebtedness is
$466.3 million for Fiscal Year 1996.
For many years prior to 1991, both Moody's and S&P rated New Jersey general
obligation bonds "Aaa" and "AAA", respectively. On July 3, 1991, however, S&P
downgraded New Jersey general obligation bonds to "AA+." On August 26, 1992,
Moody's downgraded New Jersey general obligation bonds to "Aa1". The issuance of
the $59,000,000 State of New Jersey General Obligation Bonds on November 23,
1994, was rated AA+ by S&P and Aa1 by Moody's. As of the date this Prospectus
was completed, the State of New Jersey was expected to sell general obligation
debt on or about May 1, 1996. Sometime prior to this date, the applicable credit
rating agencies are anticipated to issue updated credit ratings for the State of
New Jersey. Although impacted in general by the financial condition of the
State, local municipalities issuing New Jersey Municipal Obligations have credit
ratings that are determined with reference to the financial condition of such
local municipalities.
Capital Construction
In addition to payments from bond proceeds, capital construction can also be
funded by appropriation of current revenues on a pay-as-you-go basis. This
amount represents 1.3% of the total Fiscal Year 1996 Budget. In Fiscal Year
1996, the amount appropriated to this purpose is $217.1 million.
All appropriations for capital projects and all proposals for State bond
authorization are subject to the review and recommendation of the New Jersey
Commission on Capital Budgeting and Planning. This permanent commission was
established in November 1975, and is charged with the preparation of the State
Capital Improvement Plan, which contains proposals for State spending for
capital projects.
TAX AND REVENUE ANTICIPATION NOTES
In Fiscal Year 1992, the State initiated a program under which it issued tax
and revenue anticipation notes to aid in providing effective cash flow
management to fund balances which occur in the collection and disbursement of
the General Fund and Property Tax Relief Fund revenues. As of January 31, 1996,
there are $450,000,000 of tax and revenue anticipation notes issued and
outstanding. These notes shall mature on June 14, 1996.
Such tax and revenue anticipation notes do not constitute a general obligation
of the State or a debt or liability within the meaning of the State
Constitution. Such notes constitute special obligations of the State payable
solely from moneys on deposit in the General Fund and the Property Tax Relief
Fund and legally available for such payment.
OTHER STATE RELATED OBLIGATIONS
LEASE FINANCING
The State has entered into a number of leases relating to the financing of
certain real property and equipment. The State leases the Richard J. Hughes
Justice Complex in Trenton from the Mercer County Improvement Authority (the
"MCIA"). On August 8, 1991 the MCIA defeased outstanding bonds originally issued
to finance construction of the Richard J. Hughes Justice Complex through the
issuance of custody receipts (the "Custody Receipts") in the aggregate principal
amount of $98,760,000. The rental is sufficient to
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cover the debt service on the MCIA's Custody Receipts. The State's obligation to
pay the rentals is subject to appropriations being made by the State
Legislature.
The State has also entered into a lease agreement, as lessee, with the New
Jersey Economic Development Authority, (the "EDA") as lessor to lease (i) office
buildings that house the New Jersey Division of Motor Vehicles, New Jersey
Network (the State's public television station) a branch of the United States
Postal Service and a parking facility and (ii) to lease approximately 13 acres
of real property and certain infrastructure improvements thereon located in the
City of Newark.
Beginning in April 1984, the State, acting through the Director of the
Division of Purchase and Property, entered into a series of lease purchase
agreements which provide for the acquisition of equipment, services and real
property to be used by various departments and agencies of the State. To date,
the State has completed eleven lease purchase agreements which have resulted in
the issuance of Certificates of Participation totaling $749,350,000. A
Certificate of Participation evidences a proportionate interest of the owner
thereof in the lease payments to be made by the State under the terms of the
agreement. The agreements relating to these transactions provide for semiannual
rental payments. The State's obligation to pay rentals due under these leases is
subject to annual appropriations being made by the State Legislature. The
majority of proceeds from these transactions have been or will be used to
acquire equipment and services for the State and its agencies. The State intends
to continue to use this financing technique for a substantial portion of its
future equipment requirements.
The EDA anticipates that it will issue in the near future, subject to receipt
of certain approvals, approximately $70 million of Bonds to provide financing
for the New Jersey Performing Arts Center in Newark, New Jersey. These Bonds, if
and when issued, will be limited obligations of the Authority, payable from
lease revenues to be received from the State, subject to appropriation.
MARKET TRANSITION FACILITY
Legislation enacted in June 1994 authorizes the EDA to issue bonds to pay the
current and anticipated liabilities and expenses of the Market Transition
Facility, which issued private passenger automobile insurance policies for
drivers who could not be insured by private insurance companies on a voluntary
basis. On July 26, 1994 the EDA issued $705,270,000 aggregate principal amount
of Market Transition Facility Senior Lien Revenue Bonds, Series 1994A. The EDA
and State Treasury have entered into an agreement which provides for the payment
to the EDA of amounts on deposit in the DMV Surcharge Fund to pay debt service
on the bonds. Such payments are subject to and dependent upon appropriations
being made by the State Legislature.
EDUCATIONAL FACILITIES AUTHORITY
Legislation enacted in 1993 authorizes the Educational Facilities Authority
(the "EFA") to issue bonds to finance the purchase of equipment to be leased to
institutions of higher learning. On August 17, 1994 the EFA issued $100,000,000
aggregate principal amount of Higher Education Leasing Fund Program bonds. The
EFA and the State Treasurer have entered into an agreement which provides to the
EFA amounts required to pay debt service on the bonds. Such payments are subject
to and dependent upon appropriations being made by the State Legislature.
Other legislation enacted in 1993 created the Higher Education Facilities
Trust Fund from which the EFA is authorized to make grants to New Jersey's
public and private institutions of higher education for the development,
construction and improvement of instructional, laboratory, communication and
research facilities. Under this legislation the EFA is authorized to issue bonds
to finance such grants. The legislation limits the total outstanding principal
amount to $220,000,000. On November 29, 1995 the EFA issued $220,000,000
aggregate principal amount of Higher Education Facilities Trust Fund Bonds,
Series 1995A. These bonds are secured by payments to be made to the EFA by the
State, which payments are subject to and dependent upon appropriations being
made by the State Legislature.
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STATE SUPPORTED SCHOOL AND COUNTY COLLEGE BONDS
Legislation provides for future appropriations for State Aid to local school
districts equal to debt service on a maximum principal amount of $280,000,000 of
bonds issued by such local school districts for construction and renovation of
school facilities and for State Aid to counties equal to debt service on up to
$80,000,000 of bonds issued by counties for construction of county college
facilities. The State Legislature is not legally bound to make such future
appropriations, but has done so to date on all outstanding obligations issued
under these laws. As of December 31, 1995, the maximum amount of $280,000,000
school district bonds has been approved for State support. Bonds or notes in the
amount of $274,074,000 have been issued by local school districts, of which
$240,638,828 have been retired and $33,435,175 are still outstanding. As of June
30, 1995, $32,787,367 of county college bonds or notes are outstanding. In
addition to these acts, there is legislation which establishes a school bond
reserve within the constitutionally dedicated fund for the Support of Free
Public Schools (see "MUNICIPAL FINANCE -- New Jersey School Bond Reserve Act").
"MORAL OBLIGATION" FINANCING
The authorizing legislation for certain State entities provides for specific
budgetary procedures with respect to certain obligations issued by such
entities. Pursuant to such legislation, a designated official is required to
certify any deficiency in a debt service reserve fund maintained to meet
payments of principal of and interest on the obligations, and a State
appropriation in the amount of the deficiency is to be made. However, the State
Legislature is not legally bound to make such an appropriation. Bonds issued
pursuant to authorizing legislation of this type are sometimes referred to as
"moral obligation" bonds. There is no statutory limitation on the amount of
"moral obligation" bonds which may be issued by eligible State entities.
NEW JERSEY SPORTS AND EXPOSITION AUTHORITY
On March 2, 1992, the New Jersey Sports and Exposition Authority (the "Sports
Authority") issued $147,490,000 in State guaranteed bonds and defeased all
previously outstanding State guaranteed bonds of the Sports Authority. The State
believes that the revenue of the Sports Authority will be sufficient to provide
for the payment of debt service on these obligations without recourse to the
State's guarantee.
Legislation enacted in 1992 by the State authorizes the Sports Authority to
issue bonds for various purposes payable from State appropriations. Pursuant to
this legislation, the Sports Authority and the State Treasurer have entered into
an agreement (the "State Contract") pursuant to which the Sports Authority will
undertake certain projects, including the refunding of certain outstanding bonds
of the Sports Authority, and the State Treasurer will credit to the Sports
Authority Fund amounts from the General Fund sufficient to pay debt service and
other costs related to the bonds. The payment of all amounts under the State
Contract is subject to and dependent upon appropriations being made by the State
Legislature. As of June 30, 1995 there are approximately $473,410,000 aggregate
principal amount of Sports Authority bonds currently outstanding the debt
service on which is payable from amounts credited to the Sports Authority Fund
pursuant to the State Contract.
NEW JERSEY TRANSPORTATION TRUST FUND AUTHORITY
In July 1984, the State created the New Jersey Transportation Trust Fund
Authority (the "TTFA"), an instrumentality of the State organized and existing
under the New Jersey Transportation Trust Fund Authority Act of 1984, as amended
(the "TTFA Act") for the purpose of funding a portion of the State's share of
the cost of improvements to the State's transportation system. Pursuant to the
TTFA Act, the TTFA, the State Treasurer and the Commissioner of Transportation
executed a contract (the "Contract") which provides for the payment of certain
amounts to the TTFA. The payment of all such amounts is subject to and dependent
upon appropriations being made by the State Legislature and there is no
requirement that the Legislature make such appropriation. On May 30, 1995, the
State Legislature amended the New Jersey Transportation Trust Fund Act of 1984
to provide, among other things, for (i) the funding of transportation projects
through June 30, 2000, (ii) the issuance of debt in an aggregate principal
amount in excess of the statutory debt limitation in effect prior to the
enactment of the 1995 Amendments, (iii) an increase in the amount of revenues
available to the Authority and (iv) broadening the scope of transportation
projects.
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Pursuant to the TTFA Act, the principal amount of the TTFA's bonds, notes or
other obligations which may be issued in any fiscal year generally may not
exceed $700 million plus amounts carried over from prior fiscal years. These
bonds are special obligations of the TTFA payable from the payments made by the
State pursuant to the Contract.
ECONOMIC RECOVERY FUND BONDS
Legislation enacted during 1992 by the State authorizes the EDA to issue bonds
for various economic development purposes. Pursuant to that legislation, EDA and
the State Treasurer have entered into an agreement (the "ERF Contract") through
which EDA has agreed to undertake the financing of certain projects and the
State Treasurer has agreed to credit to the Economic Recovery Fund from the
General Fund amounts equivalent to payments due to the State under an agreement
with the Port Authority of New York and New Jersey. The payment of all amounts
under the ERF Contract is subject to and dependent upon appropriations being
made by the State Legislature.
MUNICIPAL FINANCE
New Jersey's local finance system is regulated by various statutes. Regulatory
and remedial statutes are enforced by the Division of Local Government Services
(the "Division") in the State Department of Community Affairs.
COUNTIES AND MUNICIPALITIES
The Local Budget Law imposes specific budgetary procedures upon counties and
municipalities ("local units"). Every local unit must adopt an operating budget
which is balanced on a cash basis, and items of revenue and appropriation must
be examined by the Director of the Division (the "Director"). The accounts of
each local unit must be independently audited by a registered municipal
accountant. State law provides that budgets must be submitted in a form
promulgated by the Division and further provides for limitations on estimates of
tax collection and for reserves in the event of any shortfalls in collections by
the local unit. The Division reviews all municipal and county annual budgets
prior to adoption for compliance with the Local Budget Law. The Director is
empowered to require changes for compliance with law as a condition of approval;
to disapprove budgets not in accordance with law; and to prepare the budget of a
local unit, within the limits of the adopted budget of the previous year with
suitable adjustments for legal compliance, if the local unit fails to adopt a
budget in accordance with law.
The Local Government Cap Law (the "Cap Law") generally limits the year-to-year
increase of the total appropriations of any municipality and the tax levy of any
county to either 5 percent or an index rate determined annually by the Director,
whichever is less. However, where the index percentage rate exceeds 5 percent,
the Cap Law permits the governing body of any municipality or county to approve
the use of a higher percentage rate up to the index rate. Further, where the
index percentage rate is less than 5 percent, the Cap Law also permits the
governing body of any municipality or county to approve the use of a higher
percentage rate up to 5 percent. Regardless of the rate utilized, certain
exceptions exist to the Cap Law's limitation on increases in appropriations. The
principal exceptions to these limitations are municipal and county
appropriations to pay debt service requirements; to comply with certain other
State or federal mandates; appropriations of private and public dedicated funds;
amounts approved by referendum; and, in the case of municipalities only, to fund
the preceding year's cash deficit with the approval of the Local Finance Board
or to reserve for shortfalls in tax collections, and amounts required pursuant
to contractual obligations for specified services. The Cap Law was re-enacted in
1990 with amendments and made a permanent part of the municipal finance system.
State law also regulates the issuance of debt by local units. The Local Budget
Law limits the amount of tax anticipation notes that may be issued by local
units and requires the repayment of such notes within 120 days of the end of the
fiscal year (six months in the case of the counties) in which issued. The Local
Bond Law governs the issuance of bonds and notes by the local units. No local
unit is permitted to issue bonds for the payment of current expenses (other than
Fiscal Year Adjustment Bonds described more fully below). Local units may not
issue bonds to pay outstanding bonds, except for refunding purposes, and then
only with the
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approval of the Local Finance Board. Local units may issue bond anticipation
notes for temporary periods not exceeding in the aggregate approximately ten
years from the date of first issue. The debt that any local unit may authorize
is limited to a percentage of its equalized valuation basis, which is the
average of the equalized value of all taxable real property and improvements
within the geographic boundaries of the local unit, as annually determined by
the Director of the Division of Taxation, for each of the three most recent
years. In the calculation of debt capacity, the Local Bond Law and certain other
statutes permit the deduction of certain classes of debt ("statutory
deductions") from all authorized debt of the local unit ("gross capital debt")
in computing whether a local unit has exceeded its statutory debt limit.
Statutory deductions from gross capital debt consist of bonds or notes (i)
authorized for school purposes by a regional school district or by a
municipality or a school district with boundaries coextensive with such
municipality to the extent permitted under certain percentage limitations set
forth in the School Bond Law (as hereinafter defined); (ii) authorized for
purposes which are self liquidating, but only to the extent permitted by the
Local Bond Law; (iii) authorized by a public body other than a local unit the
principal of and interest on which is guaranteed by the local unit, but only to
the extent permitted by law; (iv) that are bond anticipation notes; (v) for
which provision for payment has been made or (vi) authorized for any other
purpose for which a deduction is permitted by law. Authorized net capital debt
(gross capital debt minus statutory deductions) is limited to 3.5 percent of the
equalized valuation basis in the case of municipalities and 2 percent of the
equalized valuation basis in the case of counties. The debt limit of a county or
municipality, with certain exceptions, may be exceeded only with the approval of
the Local Finance Board.
Chapter 75 of the Pamphlet Laws of 1991, signed into law on March 28, 1991
required certain municipalities and permits all other municipalities to adopt
the State fiscal year in place of the existing calendar fiscal year. The act
provides that municipalities opting to change to a Fiscal Year must adopt a six-
month transition year budget funded by Fiscal Year Adjustment Bonds. Notes
issued in anticipation of Fiscal Year Adjustment Bonds, including renewals, can
only be issued for up to one year unless the Local Finance Board permits the
municipality to renew them for a further period of time. The Local Finance Board
must confirm the actual deficit experienced by the municipality. The
municipality then may issue Fiscal Year Adjustment Bonds to finance the deficit
on a permanent basis.
State law authorizes State officials to supervise fiscal administration in any
municipality which is in default on its obligations; which experiences severe
tax collection problems for two successive years; which has a deficit greater
than 4 percent of its tax levy for two successive years; which has failed to
make payments due and owing to the State, county, school district or special
district for two consecutive years; which has an appropriation in its annual
budget for the liquidation of debt which exceeds 25 percent of its total
operating appropriations (except dedicated revenue appropriations) for the
previous budget year; or which has been subject to a judicial determination of
gross failure to comply with the Local Bond Law, the Local Budget Law or the
Local Fiscal Affairs Law which substantially jeopardizes its fiscal integrity.
State officials are authorized to continue such supervision for as long as any
of the conditions exist and until the municipality operates for a fiscal year
without incurring a cash deficit.
There are 567 municipalities and 21 counties in New Jersey. During 1993, 1994
and 1995 no county exceeded its statutory debt limitations or incurred a cash
deficit in excess of 4 percent of its tax levy. Only two municipalities had a
cash deficit greater than 4% of their tax levies for 1994 and 1995. The number
of municipalities which exceeded statutory debt limits was six as of December
31, 1994. No New Jersey municipality or county has defaulted on the payment of
interest or principal on any outstanding debt obligation since the 1930's.
SCHOOL DISTRICTS
New Jersey's school districts operate under the same comprehensive review and
regulation as do its counties and municipalities. Certain exceptions and
differences are provided, but the State supervision of school finance closely
parallels that of local governments.
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Types of School Districts
All New Jersey school districts are coterminous with the boundaries of one or
more municipalities. They are characterized by the manner in which the board of
education, the governing body of the school district, takes office. Type I
school districts, most commonly found in cities, have a board of education
appointed by the mayor or the chief executive officer of the municipality
constituting the school district. In a Type II school district, the board of
education is elected by the voters of the district. Nearly all regional and
consolidated school districts are Type II school districts.
The State Department of Education has been empowered with the necessary and
effective authority to abolish an existing school board and create a
State-operated school district where the existing school board has failed or is
unable to take the corrective actions necessary to provide a thorough and
efficient system of education in that school district pursuant to N.J.S.A.
18A:7A-15 et seq. (the "School Intervention Act"). The State-operated school
district, operated under the direction of a State-appointed superintendent, has
all of the powers and authority of the local Board of Education and of the local
district superintendent. Pursuant to the authority granted under the School Act,
on October 4, 1989, the State Board of Education ordered the creation of a State
operated school district in the City of Jersey City. Similarly, on August 7,
1991, the State Board of Education ordered the creation of a State operated
school district in the City of Paterson and on July 5, 1995 ordered the creation
of a State-operated school district in the City of Newark.
School Budgets
In every school district having a board of school estimate, the board of
school estimate examines the budget request and fixes the appropriation amounts
for the next year's operating budget after a public hearing at which the
taxpayers and other interested persons shall have an opportunity to raise
objections and to be heard with respect to the budget. This board, whose
composition is fixed by statute, certifies the budget to the municipal governing
bodies and to the local board of education. If the local board of education
disagrees, it must appeal to the State Commissioner of Education (the
"Commissioner") to request changes.
In a Type II school district without a board of school estimate, the elected
board of education develops the budget proposal and, after public hearing,
submits it to the voters of such district for approval. Previously authorized
debt service is not subject to referendum in the annual budget process. If
approved, the budget goes into effect. If defeated, the governing body of each
municipality in the school district has until May 19 in any year to determine
the amount necessary to be appropriated for each item appearing in such budget.
Should the governing body fail to certify an amount determined by the Board of
Education to be necessary, the Board of Education may appeal the action to the
Commissioner of Education.
The State laws governing the distribution of State aid to local school
districts limit the annual increase of a school district's net budget. The
Commissioner certifies the allowable amount of increase for each school district
but may grant a higher level of increase in certain limited instances. A school
district may also submit a proposal to the voters to raise amounts above the
allowable amount of increase. If defeated, such a proposal is subject to further
review or appeal to the Commissioner only if the County Superintendents of
Schools has determined that additional funds are required to provide a thorough
and efficient education.
The County Superintendents of Schools must also review every proposed local
school district budget for the next school year. The County Superintendents of
Schools examine every item of appropriation for current expenses and budgeted
capital outlay to determine their adequacy in relation to the identified needs
and goals of the school district. If in their view they are insufficient, the
County Superintendents of Schools may order remedial action. If necessary, the
Commissioner is authorized to order changes in the school district's budget.
School District Bonds
School district bonds and temporary notes are issued in conformity with
N.J.S.A. 18A:24-1 et seq. (the "School Bond Law"), which closely parallels the
Local Bond Law (for further information relating to the Local Bond Law, see
"MUNICIPAL FINANCE -- Counties and Municipalities" herein). Although school
districts are exempted from the 5 percent down payment provision generally
applied to bonds issued by municipalities and counties, they are subject to debt
limits (which vary depending on the type of school
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system provided) and to State regulation of their borrowing. The debt limitation
on school district bonds depends upon the classification of the school district,
but may be as high as 4 percent of the average equalized valuation basis of the
constituent municipality. In certain cases involving school districts in cities
with populations exceeding 100,000, the debt limit is 8 percent of the average
equalized valuation basis of the constituent municipality, and in cities with
populations in excess of 80,000 the debt limit is 6 percent of the aforesaid
average equalized valuation.
School bonds are authorized by (i) an ordinance adopted by the governing body
of a municipality within a Type I school district; (ii) adoption of a proposal
by resolution by the board of education of a Type II school district having a
board of school estimate; (iii) adoption of a proposal by resolution by the
board of education and approval of the proposal by the legal voters of any other
Type II school district; or (iv) adoption of a proposal by resolution by a
capital project control board pursuant to N.J.S.A. 18A:7A-46.1 et seq. for
projects in a State operated school district. If school bonds will exceed the
school district borrowing capacity, a school district (other than a regional
school district) may use the balance of the municipal borrowing capacity. If the
total amount of debt exceeds the school district's borrowing capacity and any
available remaining municipal borrowing capacity, the Commissioner and the Local
Finance Board must approve the proposed authorization before it is submitted to
the voters. All authorizations of debt in a Type II school district without a
board of school estimate require an approving referendum, except where, after
hearing, the Commissioner and the State Board of Education determine that the
issuance of such debt is necessary to meet the constitutional obligation to
provide a thorough and efficient system of public schools. When such obligations
are issued, they are issued by, and in the name of, the school district.
School District Lease Purchase Financings
In 1982, school districts were given an alternative to the traditional method
of bond financing capital improvements pursuant to N.J.S.A. 18A:20-4.2(f) (the
"Lease Purchase Law"). The Lease Purchase Law permits school districts to
acquire a site and school building through a lease purchase agreement with a
private lessor corporation. The lease purchase agreement does not require voter
approval. The rent payments attributable to the lease purchase agreement are
subject to annual appropriation by the school district and are required,
pursuant to N.J.A.C. 6:22A-1.2(h), to be included in the annual current expense
budget of the school district. Furthermore, the rent payments attributable to
the lease purchase agreement do not constitute debt of the school district and
therefore do not impact on the school district's debt limitation. Lease purchase
agreements in excess of five years require the approval of the Commissioner and
the Local Finance Board.
New Jersey School Bond Reserve Act
The New Jersey School Bond Reserve Act establishes a school bond reserve
within the constitutionally dedicated Fund for the Support of Free Public
Schools. Under this law the reserve is maintained at an amount equal to 1.5
percent of the aggregate outstanding bonded indebtedness of counties,
municipalities or school districts for school purposes (exclusive of bonds whose
debt service is provided by State appropriations), but not in excess of monies
available in such Fund. If a municipality, county or school district is unable
to meet payment of the principal of or interest on any of its school bonds, the
trustee of the school bond reserve will purchase such bonds at the face amount
thereof or pay the holders thereof the interest due or to become due. At June
30, 1995, the book value of the Fund's assets aggregated $88,736,798 and the
reserve, computed as of June 30, 1995, amounted to $38,811,015. There has never
been an occasion to call upon this Fund. The State provides support of certain
bonds of counties, municipalities and school districts through various statutes.
(See "OTHER STATE RELATED OBLIGATIONS -- State Supported School and County
College Bonds" herein).
QUALIFIED BONDS
In 1976, legislation was enacted which provides for the issuance by
municipalities and school districts of "qualified bonds." Whenever a local board
of education or the governing body of a municipality determines to issue bonds,
it may file an application with the Local Finance Board, and, in the case of a
local board of education, the Commissioner, to qualify bonds pursuant to P.L.
1976, c. 38 or c. 39. Upon approval of such an application and after receipt of
a certificate stating the name and address of the paying agent for such bonds,
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the maturity schedule, interest rates and payment dates, the State Treasurer
shall, in the case of qualified bonds for school districts, withhold from the
school aid payable to such municipality or school district and, in the case of
qualified bonds for municipalities, withhold from the amount of business
personal property tax replacement revenues, gross receipts tax revenues,
municipal purposes tax assistance fund distributions, State urban aid, State
revenue sharing, and any other funds appropriated as State aid and not otherwise
dedicated to specific municipal programs, payable to such municipalities, an
amount sufficient to cover debt service on such bonds. These "qualified bonds"
are not direct, guaranteed or moral obligations of the State, and debt service
on such bonds will be provided by the State only if the above mentioned
appropriations are made by the State. Total outstanding indebtedness for
"qualified bonds" consisted of $224,492,700 by various school districts as of
June 30, 1995 and $903,760,316 by various municipalities as of June 30, 1995.
LOCAL FINANCING AUTHORITIES
The Local Authorities Fiscal Control Law provides for State supervision of the
fiscal operations and debt issuance practices of independent local authorities
and special taxing districts by the State Department of Community Affairs. The
Local Authorities Fiscal Control Law applies to all autonomous public bodies
created by counties or municipalities, which are empowered to issue bonds, to
impose facility or service charges, or to levy taxes in their districts. This
encompasses most autonomous local authorities (sewerage, municipal utilities,
parking, pollution control, improvement, etc.) and special taxing districts
(fire, water, etc.). Authorities which are subject to differing State or federal
financial restrictions are exempted, but only to the extent of that difference.
Financial control responsibilities over local authorities and special
districts are assigned to the Local Finance Board and the Director of the
Division of Local Government Services. The Local Finance Board exercises
approval power over the creation of new authorities and special districts as
well as their dissolution. The Local Finance Board also reviews, conducts public
hearings and issues findings and recommendations on any proposed project
financing of an authority or district, and on any proposed financing agreement
between a municipality or county and an authority or special district. The Local
Finance Board prescribes minimum audit requirements to be followed by
authorities and special districts in the conduct of their annual audits. The
Director reviews and approves annual budgets of authorities and special
districts.
As of June 30, 1994 there were 196 locally created authorities with a total
outstanding capital debt of $7,000,077,854 (figures do not include housing
authorities and redevelopment agencies). This amount reflects outstanding bonds,
notes, and loans payable by the authorities as of their respective fiscal years
ended nearest to June 30, 1994.
STATE EMPLOYEES
PUBLIC EMPLOYER-EMPLOYEE RELATIONS ACT
The State of New Jersey, as a public employer, is covered by the New Jersey
Public Employer-Employee Relations Act, as amended which guarantees public
employees the right to negotiate collectively through employee organizations
certified or recognized as the exclusive collective negotiations representatives
for units of public employees found to be appropriate for collective
negotiations purposes. Approximately 64,500 employees are paid through the State
payroll system. Of the 64,500 employees, 56,800 are represented by certified or
recognized exclusive majority representatives and are organized into various
negotiation units.
FINANCING PENSIONS
Virtually all of the public employees of the State and its counties,
municipalities and political subdivisions are members of pension plans
administered by the State. The State operates seven retirement plans. Public
Employees' Retirement System ("PERS") and Teachers Pension and Annuity Fund
("TPAF"), originally created by acts of the State Legislature in 1920 and 1919,
respectively, are the principal plans, together covering 391,909 of the total
433,098 active members covered by all State-administered plans. The other
systems are Police and Firemen's Retirement System ("PFRS") (38,217 members),
Consolidated Police and
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Firemen's Pension Fund ("CP&FPF") (no active members), State Police Retirement
System ("SPRS") (2,576 members), Judicial Retirement System ("JRS") (396
members) and Prison Officers' Pension Fund ("POPF") (no active members).
The various pension funds were analyzed between July 1, 1994 and July 1, 1995
by independent actuaries who reported that the present value of accumulated
benefits, the Accumulated Benefit Obligation determined in accordance with
Statement No. 87 of the Financial Accounting Standards Board (including the
present value of post-retirement medical benefits for PERS state employees and
TPAF), for which the State is obligated (including both vested and non-vested
benefits) for the seven pension funds approximates $39.2 billion at the
valuation dates. The studies indicated that the market value of all assets of
the funds was $41.5 billion which, when compared to the $39.2 billion
Accumulated Benefit Obligation, represents a funding level of 105.8%. The
present value of projected benefits, the Pension Benefit Obligation determined
in accordance with Statement No. 5 of the Governmental Accounting Standards
Board, of the funds is $48.4 billion. The funding level for the projected
benefits is 85.6%.
$496.6 million is provided in the Fiscal Year 1996 Appropriations Act as the
State's contributions to public retirement plans.
Chapter 62, Laws of 1994, enacted by the State Legislature and approved by the
Governor on June 30, 1994 made several changes to the funding of the pension
systems, including the Public Employees Retirement System, the Teachers' Pension
and Annuity Fund, the Judicial Retirement System, the State Police Retirement
System, and the Police and Firemen's Retirement System. These reforms include: a
change of the actuarial method used to determine funding requirements for the
systems from the entry age normal to the projected unit credit method; revision
of funding for post-retirement medical benefits under TPAF and PERS; phase in of
revised actuarial assumptions under TPAF; elimination of 2% subsidy in employee
pension contributions rates under TPAF and PERS and implementation of a flat
employee contribution rate of 5%; return to the original phase-in schedule for
recognition of the liability for pension adjustment benefits, Cost of Living
Adjustment ("COLA") for active members; reduction in the salary increase
assumption to an average of 5.95% and a reduction in the inflation assumption
for COLA benefits to 2.4%.
Certain unions and various individuals have instituted litigation in the
United States District Court in Newark challenging the changes to the pension
systems which were made by the State Legislature when it enacted P.L. 1994, c.
62. (See "LITIGATION -- New Jersey Education Association et al. v. State of New
Jersey et al.").
LITIGATION
The following are cases presently pending or threatened in which the State has
the potential for either a significant loss of revenue or a significant
unanticipated expenditure.
New Jersey Education Association et. al v. State of New Jersey et. al. This
case represents a challenge to amendments to the pension laws enacted on June
30, 1994 (P.L. 1994, Chapter 62), which concerned the funding of the Teachers
Pension and Annuity Fund ("TPAF"), the Public Employee's Retirement System
("PERS"), the Police and Fireman's Retirement System ("PFRS"), the State Police
Retirement System ("SPRS") and the Judicial Retirement System ("JRS"). The
complaint was filed in the United States District Court of New Jersey on October
17, 1994. The statute, P.L. 1994, Chapter 62 ("Chapter 62"), as enacted, made
several changes affecting these retirement systems including changing the
actuarial funding method to projected unit credit; continuing the prefunding of
post-retirement medical benefits but at a reduced level for TPAF and PERS;
revising the employee member contribution rate to a flat 5% for TPAF and PERS;
extending the phase in period for the revised TPAF actuarial assumptions;
changing the phase-in period for funding of cost-of-living adjustments and
reducing the inflation assumption for the Cost of Living Adjustment ("COLA") for
all retirement systems; and decreasing the average salary increase assumption
for all retirement systems. Plaintiffs allege that the changes resulted in lower
employer contributions in order to reduce a general budget deficit. The
complaint further alleges that certain provisions of Chapter 62 violate the
contract, due process, and taking clauses of the United States and New Jersey
Constitutions, and further constitute a breach of the State's fiduciary duty to
participants in TPAF and PERS. Plaintiffs seek to permanently enjoin the State
from administering, enforcing or otherwise implementing Chapter 62. An
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adverse determination against the State would have a significant impact upon the
Fiscal Year 1996 budget and the proposed Fiscal Year 1997 budget. The State
filed a motion to dismiss and a motion for summary judgment.
On October 6, 1995, the Court issued its opinion in which it dismissed the
State as a party to the action. The only defendant is Treasurer Clymer. The
claims surviving the motion are: (1) breach of trust and fiduciary duty (against
the Treasurer in both his individual and official capacities); (2) violation of
Due Process (against the Treasurer in both his individual and official
capacities); and (3) a 42 U.S.C. sec. 1983 claim (against the Treasurer in his
individual capacity).
The forms of relief sought related to these surviving claims are: (1) a
declaration that certain provisions of Chapter 62 violate Due Process of law
under the Fifth and Fourteenth Amendments to the U.S. Constitution; (2) a
declaration that the enactment and implementation of certain provisions of
Chapter 62 constitute a breach of the fiduciary obligations owed to contributing
participants, vested participants and retirees of the TPAF and PERS; (3) a
declaration that Chapter 62 contravenes the statutory and common law duties to
administer and fund the plans in an actuarially sound and fiscally responsible
manner; (4) a permanent injunction against administering, enforcing or otherwise
implementing certain provisions of Chapter 62; (5) directing payment of
plaintiffs' attorneys' fees, disbursements and costs pursuant to 42 U.S.C. sec.
1988.
The State filed a motion for reconsideration or, in the alternative, for
certification to the Third Circuit Court of Appeals, of the remaining claims. By
order dated December 19, 1995, the District Court denied the motion in all
respects. On January 29, 1996, the State, on behalf of Treasurer Clymer, filed a
Petition for a Writ of Mandamus and a Motion for a Stay of the Proceedings
below, pending consideration and disposition of the petition, with the Third
Circuit Court of Appeals. In the petition, Treasurer Clymer asked the Court of
Appeals to direct the District Court to dismiss the complaint or enter summary
judgment in his favor. Alternatively, the Treasurer asked the Court of Appeals
to order the District Court to vacate its order denying summary judgment and
resolve that motion as a matter of law without discovery or fact finding or to
certify the issues for interlocutory appeal. The Third Circuit Court of Appeals
denied the motion and petition on February 20, 1996. Discovery is proceeding in
this matter. The State intends to vigorously defend this action.
New Jersey Hospital Association et. al. v. Waldman, et. al. This case is a
challenge by the New Jersey Hospital Association and certain hospitals of the
adequacy of Medicaid reimbursement for hospital services. Plaintiffs allege that
the Department of Human Services ("DHS") and various State entities and
representatives (collectively referred to as the "State") have violated certain
reimbursement standards established by the Boren Amendment to Title XIX of the
Social Security Act. Plaintiffs seek a preliminary injunction preventing the
recently amended rate regulations from being implemented. If enjoined, the State
will expend an additional $154,000,000 for hospital rates in calendar year 1995,
half of which is paid by federal funds. Plaintiffs are further seeking a
declaration that the State violated federal law and a permanent injunction
against DHS requiring it to comply with federal law concerning the setting of
rates. Plaintiffs also seek costs and attorneys' fees. A Motion for Preliminary
Injunction was filed on March 23, 1995, and was denied on May 25, 1995. The New
Jersey Hospital Association has appealed the denial to the United States Court
of Appeals for the Third Circuit, which also denied the application, as well as
a petition for panel rehearing. The New Jersey Hospital Association filed a
stipulation of voluntary dismissal on April 12, 1996.
Beth Israel Hospital et. al. v. Essential Health Services Commission. This
case represents a challenge by eleven New Jersey hospitals to the .53% hospital
assessment authorized by the Health Care Reform Act of 1992, specifically
N.J.S.A. 26:2H-18.62. Amounts collected pursuant to the assessment are paid into
the hospital and other health care initiatives account of the Health Care
Subsidy Fund, to be used for various health care programs. Specifically, the
funds are currently used for those programs previously established pursuant to
N.J.S.A. 26:2H-18.47. In this appeal of the assessment, filed with the Appellate
Division on December 6, 1993, appellants argue that collection of the assessment
is invalid in the absence of Hospital Rate Setting Commission approval of the
approved revenue base used in the calculation. At the same time, appellants
filed an application for injunctive relief, seeking to stay any collection,
which application was denied. In a decision dated July 10, 1995, the Appellate
Division rejected appellants' contention that the respondents were prohibited
from collecting the assessment. However, the court also found that the hospitals
had not been afforded an opportunity to be heard on the assessment, and thus
remanded the case to the
B-51
<PAGE> 774
Essential Health Services Commission for a hearing. Because the Commission has
been abolished by L. 1995, c. 133, and its responsibilities assigned to the
Department of Health, the Department of Health held the hearing on August 30,
1995. A determination is now pending.
Fair Automobile Insurance Reform Act Litigation. On March 12, 1990, the Fair
Automobile Insurance Reform Act of 1990 ("FAIR Act") was enacted into law. It
recently was amended by L. 1994, c. 57. The FAIR Act substantially altered New
Jersey's statutory scheme governing private passenger automobile insurance. The
New Jersey Automobile Full Insurance Underwriting Association ("JUA") an
unincorporated non-profit association created in 1983 to provide automobile
insurance to those unable to secure such coverage in the voluntary market, was
precluded from issuing or renewing automobile insurance policies after October
1, 1990. The FAIR Act included provisions governing the transition of drivers
insured by the JUA first to the Market Transition Facility ("MTF") and then to
the voluntary market and, to the extent such coverage is not available, to an
Assigned Risk Plan. The FAIR Act also provided for the imposition of taxes and
assessments to meet the financial obligations of the JUA, which are not debts,
liabilities or obligations of the State. The FAIR Act's revenue raising measures
were not reflected in the current budget because the anticipated revenues are to
be applied by statute to the JUA financial obligations. L. 1994, c. 57 provides
for the application of these anticipated revenues to the MTF. The FAIR Act also
provides for the making of assessments by the New Jersey Property Liability
Insurance Guaranty Association upon property and casualty liability insurers in
order to raise $160 million dollars per year for the period 1990 to 1997. The
funds will also be used for the JUA and MTF.
Litigation challenging the FAIR Act is virtually completed. Only one "as
applied" challenge to the Fair Act surtax and assessment provisions remains.
Miscellaneous protective claims for refunds are currently pending against the
surtax as well. State Farm alleged that its constitutional rights were violated
and that it was entitled to refunds of FAIR Act surtaxes and assessments. The
State Farm matter was decided in favor of the State and its petition for
certification to the Supreme Court was denied. State Farm has filed a Petition
for Writ of Certiorari by the Supreme Court. The State has filed a brief in
opposition to the Writ of Certiorari.
Tort, Contract and Other Claims. At any given time, there are various numbers
of claims and cases pending against the State, State agencies and employees,
seeking recovery of monetary damages that are primarily paid out of the fund
created pursuant to the New Jersey Tort Claims Act. The State does not formally
estimate its reserve representing potential exposure for these claims and cases.
The State is unable to estimate its exposure for these claims and cases.
The State routinely receives notices of claim seeking substantial sums of
money. The majority of those claims have historically proven to be of
substantially less value than the amount originally claimed. Under the New
Jersey Tort Claims Act, any tort litigation against the State must be preceded
by a notice of claim, which affords the State the opportunity for a six-month
investigation prior to the filing of any suit against it.
In addition, at any given time, there are various numbers of contract and
other claims against the State and State agencies, including environmental
claims asserted against the State, among other parties, arising from the alleged
disposal of hazardous waste. Claimants in such matters are seeking recovery of
monetary damages or other relief which, if granted, would require the
expenditure of funds. The State is unable to estimate its exposure for these
claims.
At any given time, there are various numbers of claims and cases pending
against the University of Medicine and Dentistry and its employees, seeking
recovery of monetary damages that are primarily paid out of the Self Insurance
Reserve Fund created pursuant to the New Jersey Tort Claims Act. An independent
study estimated an aggregate potential exposure of $66.5 million for tort and
medical malpractice claims pending as of December 31, 1994. In addition, at any
given time, there are various numbers of contract and other claims against the
University of Medicine and Dentistry, seeking recovery of monetary damages or
other relief which, if granted, would require the expenditure of funds. The
State is unable to estimate its exposure for these claims.
County of Passaic v. State of New Jersey. This action filed by the County of
Passaic, the Passaic County Utilities Authority, and the Passaic County
Pollution Control Financing Authority ("plaintiffs"), alleged tort and
contractual claims against the State of New Jersey ("State") and the New Jersey
Department of
B-52
<PAGE> 775
Environmental Protection ("NJDEP") associated with a resource recovery facility
which plaintiffs had once planned to build. The plaintiffs alleged that the
State and the NJDEP violated a 1984 consent order concerning the construction of
a resource recovery facility in Passaic County. Plaintiffs' complaint alleged
approximately $30 million in damages against the State and the NJDEP. On March
17, 1995, the court granted the State's motion for summary judgment, dismissing
all counts of plaintiffs' complaint against the State and the NJDEP, with
prejudice. The court found that there was no legal obligation or duty on the
part of the State or the NJDEP concerning the project. Plaintiffs have filed an
appeal of the court's decision. The State intends to vigorously defend this
appeal.
Robert E. Brennan v. Richard Barry et. al. On May 19, 1993 plaintiff Robert
Brennan filed suit against two members of the New Jersey Bureau of Securities,
Richard Barry, the Supervisor of Enforcement and Jared Silverman, Bureau Chief.
Brennan's complaint alleges various causes of action for defamation and injury
to reputation under section 1983 and state law. Plaintiff also alleges claims of
abuse of process and improper disclosure of private facts based on the Bureau's
ongoing investigation of certain publicly traded securities. The State's motion
for summary judgment was granted on January 11, 1995. Robert Brennan has filed
an appeal and the State has responded. No date for oral argument has been
scheduled. The State is unable to estimate its exposure for this claim and
intends to defend this suit vigorously.
Camden Co. v. Waldman, et al. Fifteen counties seek a portion of the $412
million in federal funds that the State received for disproportionate share
hospital payments it made to psychiatric hospitals during July 1, 1988 through
July 1, 1991. Camden County filed the first action against the Department of
Human Services, the Attorney General and the State Treasurer. Camden County
contends that the Essex decisions mandate sharing of the federal funding. Those
decisions dealt with sharing maintenance costs when there have been social
security and Medicaid payment recoveries. The State will contend that under a
recently approved Medicaid state plan amendment and federal law, the State does
not have to share the federal funding because it already paid the counties their
portion of disproportionate share hospital payments. The actions against the
attorney General and State Treasurer were dismissed and the matter was
transferred to the Appellate Division.
Similar lawsuits were filed by Middlesex, Monmouth, Atlantic, Union, Hudson,
Ocean, Mercer, Somerset, Morris, Sussex, Cape May, Essex, Warren and Passaic
counties. The Middlesex, Monmouth, Atlantic, Union, Ocean, Mercer, Morris,
Warren and Hudson County cases were transferred to the Appellate Division. The
Atlantic, Camden and Monmouth counties cases have been consolidated. Cape May
has joined in the existing calendar matters. The other counties, Essex, Warren
and Passaic, have recently had their cases transferred to the Appellate
Division, but have not sought to join in the existing matters. With the
exception of Essex, Warren and Passaic, the remaining matters will be heard on a
back to back basis by the Appellate Division. However, a motion to consolidate
or calendar these matters back to back has been made by the State. The State and
counties have filed their briefs. The State has requested oral argument because
of the complicated nature of the issues and the large amount of money involved.
Interfaith Community Organization v. Shinn, et al. In late October, 1993, the
Interfaith Community Organization ("ICO") a coalition of churches and church
leaders in Hudson County, filed suit on behalf of the ICO's membership and the
citizens of Hudson County against the Governor, the Commissioner of the New
Jersey Department of Environmental Protection ("DEP"), Commissioner of the
Department of Health ("DOH"), and Lance Miller, Assistant Commissioner of DEP.
The multicount complaint alleged violations of numerous laws, allegedly
resulting from the existence of chromium contamination in the State-owned
Liberty State Park in Jersey City. It also asserted the alleged failure by DEP
and DOH to properly conduct remediation and health screens in Hudson County
concerning chromium contamination. No immediate relief was sought, but
injunctive and monetary relief was asked for.
In June 1994, ICO hired a law firm to represent it in this matter. The firm
filed amended complaints, naming only Commissioner Shinn of DEP and Governor
Whitman as defendants and alleges only Clean Water Act ("CWA") and Resource
Conservation Recovery Act ("RCRA") violations at Liberty State Park. Under the
"citizen suit" provisions of these federal acts, plaintiff is seeking
remediation, health studies and attorneys' fees. The State is unable to estimate
its exposure for this claim. In March, 1995, ICO filed another lawsuit over the
shipments of soil from the I-287 Wetlands Mitigation Project to Liberty State
Park. The defendants in that suit are Commissioner Shinn, Governor Whitman,
Commissioner Wilson of the
B-53
<PAGE> 776
Department of Transportation ("DOT") and R. W. Vogel, Inc., the transporter of
the soil. The new suit seeks a declaration that the CWA is being violated and
demands cessation of all construction at Liberty State Park and penalties
against Vogel. That suit is the subject of a consolidation motion. The state
intends to defend these suits vigorously.
Waste Management of Pennsylvania et al v. Shinn et al. This action filed in
federal district court by Waste Management of Pennsylvania, Inc. and its
affiliate Geological Reclamation Operations and Waste Systems, Inc.
("plaintiffs") seeks declaratory and injunctive relief and compensatory damages
in excess of $19 million from Department of Environmental Protection
Commissioner Robert C. Shinn, Jr. and former Acting Commissioner Jeanne M. Fox,
("defendants") individually and in their official capacity. These claims are
based on alleged violations of the Commerce Clause and the Contracts Clause of
the United States Constitution as a result of the issuance by defendants of two
emergency redirection orders and a draft permit. The State's position is that
none of the contracts to which the plaintiffs are a party entitle them to any
relief and that therefore none of their constitutional rights have been impaired
by the Commissioners' actions. Moreover, all of the administrative agency
actions which form the gravamen of the federal complaint are currently the
subject of review in either New Jersey appellate courts or within the
Department. The State intends to vigorously defend this action in the proper
forum.
American Trucking Associations, Inc. and Tri-State Motor Transit, Co. v. State
of New Jersey. The American Trucking Associations, Inc. ("ATA") and Tri-State
Motor Transit, Co. filed a complaint in the Tax Court on March 23, 1994 against
the State of New Jersey and certain state officials challenging the
constitutionality of annual A-901 hazardous and solid waste licensure renewal
fees collected by the Department of Environmental Protection ("DEP"). A-901
refers to the Assembly bill number which was adopted in 1983 as an amendment to
the Solid Waste Management Act N.J.S.A. 13:1E-1 et seq. and codified at N.J.S.A.
13:1E-126 et seq., establishing a requirement that all persons and entities
engaged in solid and hazardous waste activities in the State be investigated
prior to the issuance of a license. Plaintiffs are alleging that the A-901
renewal fees discriminate against interstate commerce in violation of the
Commerce Clause of the United States Constitution; that the fees are not used
for the purposes for which they are levied; and that the fees do not reflect the
duration or complexity of the services rendered by the government entities
receiving the fees as required under the A-901 statute. Plaintiffs are seeking a
declaration that the fees are unconstitutional; a permanent injunction enjoining
the future collection of the fees; a refund of all annual A-901 renewal fees and
all fines and penalties collected pursuant to enforcement of these provisions;
and attorneys' fees and costs. Plaintiffs are also seeking class certification
of their action.
The DEP currently collects approximately $3.5 to $4 million in A-901 fees
annually. In previous years, the total amount of fees collected was higher
because the number of applicants and licensees subject to the fees was much
larger. It is presently unknown what portion of the A-901 fees are paid by
haulers engaged in interstate commerce, and what percentage of the monies are
renewal fees as opposed to initial application fees. Consequently, the State is
unable to estimate its exposure for this claim and intends to defend this suit
vigorously.
The New Jersey Hospital Association, et al. v. State of New Jersey. This case
is an action by the New Jersey Hospital Association, on behalf of all of its
members, and by certain named New Jersey hospitals, which seeks a declaratory
judgment that the State's failure to provide funding to the hospitals for
calendar year 1996 to reimburse them in some manner for charity care costs,
while requiring the hospitals to treat all patients without regard to ability to
pay, constitutes a violation of the takings clauses of the federal and State
constitutions. Plaintiffs seek the payment of all charity care costs incurred
since January 1, 1996, which amount is stated in the complaint to equal more
than $160,000,000 as of April, 1996. The plaintiffs claim that the failure to
provide funding may cause the hospitals to default on debt obligations, cut back
on services, suspend payments to vendors, lay off employees and take other
measures. In addition, plaintiffs seek a declaratory judgment that the State's
failure to fund charity care costs, or to provide a mechanism to permit the
hospitals to seek review or relief of charity care funding requirements,
represents an unconstitutional violation of due process. Plaintiffs also request
costs and whatever other relief the court may deem appropriate. The State
intends to vigorously defend this action.
B-54
<PAGE> 777
Abbot v. Burke. On April 19, 1996, the Education Law Center filed a motion in
aid of litigants' rights with the Supreme Court of New Jersey in the Abbot v.
Burke matter. In 1994, the Supreme Court ruled in Abbot v. Burke that the State
had to enact a funding formula that would close the spending gap between poor
urban school districts and wealthy suburban districts by Fiscal Year 1998. The
legislation to do so had to be adopted by September 1996. The Court retained
jurisdiction and required the State to make progress each year toward that goal.
In a motion filed on April 19, 1996, the Education Law Center alleges that there
is "less than a reasonable likelihood" that compliance will be achieved by
Fiscal Year 1998 and is asking the Court to order that the State reduce the
spending gap by 50% in Fiscal Year 1997. According to the plaintiffs'
calculations, such an order would result in the need to appropriate an
additional $141,000,000 for the poor urban districts beyond that amount already
proposed in the Governor's Fiscal Year 1997 Budget. The State intends to
vigorously defend this action.
B-55
<PAGE> 778
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of the
Van Kampen American Capital New Jersey Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital New Jersey Tax Free 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, and the statement of changes in net
assets and the financial highlights for the year then ended, and for the period
from July 29, 1994 (commencement of investment operations) through December 31,
1994. 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 New Jersey Tax Free Income Fund as of December 31, 1995,
the results of its operations for the year then ended, and the changes in its
net assets and financial highlights for the year then ended and for the period
from July 29, 1994 (commencement of investment operations) through December 31,
1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 13, 1996
B-56
<PAGE> 779
<TABLE>
<CAPTION>
Portfolio of Investments
December 31, 1995
- --------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
New Jersey 86.9%
$ 400 Atlantic City, NJ Brd Edl Sch (AMBAC Insd) ........ 6.125% 12/01/11 $ 432,092
250 Camden Cnty, NJ Impt Auth Lease Rev Cnty Gtd (MBIA
Insd) ............................................. 6.150 10/01/14 270,103
250 Delaware River Port Auth PA & NJ (FGIC Insd) ...... 5.500 01/01/26 252,078
250 Essex Cnty, NJ Impt Auth Lease Jail & Youth House
Proj (AMBAC Insd) ................................. 6.600 12/01/07 283,167
370 Essex Cnty, NJ Ser A1 Rfdg (AMBAC Insd) ........... 5.375 09/01/10 377,533
250 Hudson Cnty, NJ Ctfs Partn Correctional Fac Rfdg
(MBIA Insd) ....................................... 6.600 12/01/21 274,822
250 Lacey Muni Util Auth NJ Wtr Rev (MBIA Insd) ....... 6.250 12/01/24 271,545
250 Mercer Cnty, NJ Impt Auth Rev ..................... * 04/01/11 112,723
400 Mercer Cnty, NJ Impt Auth Rev Solid Waste Ser A
Rfdg (FGIC Insd) .................................. 6.700 04/01/13 421,832
500 Millburn Twp, NJ Brd Edl .......................... 5.350 07/15/12 517,870
500 New Jersey Econ Dev Auth Dist Heating & Cooling
Rev Trigen Trenton Ser A .......................... 6.200 12/01/10 517,185
400 New Jersey Econ Dev Auth Holt Hauling and Warehsg
Rev Ser G Rfdg .................................... 8.400 12/15/15 427,852
300 New Jersey Econ Dev Auth Mkt Transition Fac Rev Sr
Lien Ser A (MBIA Insd) ............................ 5.800 07/01/09 316,791
210 New Jersey Econ Dev Auth Pollutn Ctl Rev Pub Svcs
Elec & Gas Co Proj A (MBIA Insd) .................. 6.400 05/01/32 227,405
350 New Jersey Econ Dev Auth Rev RWJ Hlth Care Corp
(FSA Insd) ........................................ 6.250 07/01/14 378,133
300 New Jersey Econ Dev Auth Wtr Fac Rev Hackensack
Wtr Co Proj B Rfdg (MBIA Insd) .................... 5.900 03/01/24 308,637
490 New Jersey Hlthcare Fac Fin Auth Rev Atlantic City
Med Cent Ser C Rfdg ............................... 6.800 07/01/11 539,108
700 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd) ..................... 7.000 07/01/04 806,512
400 New Jersey Hlthcare Fac Fin Auth Rev Christ Hosp
Group Issue (Connie Lee Insd) ..................... 7.000 07/01/06 467,800
250 New Jersey Hlthcare Fac Fin Auth Rev Englewood
Hosp & Med Cent ................................... 6.700 07/01/15 262,103
250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp
Cent at Passaic (FSA Insd) ........................ 6.000 07/01/06 273,628
</TABLE>
See Notes to Financial Statements
B-57
<PAGE> 780
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
December 31, 1995
- ----------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New Jersey (Continued)
$ 250 New Jersey Hlthcare Fac Fin Auth Rev Genl Hosp Cent
at Passaic (FSA Insd) .............................. 6.750% 07/01/19 $ 285,262
400 New Jersey Hlthcare Fac Fin Auth Rev Jersey Shore
Med Cent (AMBAC Insd) .............................. 6.250 07/01/21 430,812
350 New Jersey Hlthcare Fac Fin Auth Rev Saint Clares
Riverside Med Cent (MBIA Insd) ..................... 5.750 07/01/14 358,736
500 New Jersey Hlthcare Fac Fin Auth Rev Southern Ocean
Cnty Hosp Ser A .................................... 6.125 07/01/13 505,560
400 New Jersey Sports & Exposition Auth Convention Cent
Luxury Tax Rev Ser A Rfdg (MBIA Insd) .............. 6.250 07/01/20 429,000
200 New Jersey St Edl Fac Auth Rev Caldwell College
Ser A............................................... 7.250 07/01/25 211,772
250 New Jersey St Edl Fac Auth Rev Glassboro St College
Ser A (MBIA Insd) .................................. 6.700 07/01/21 275,507
300 New Jersey St Edl Fac Auth Rev Montclair St Univ
Ser F (AMBAC Insd) ................................. 5.400 07/01/25 299,340
270 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
K (MBIA Insd) ...................................... 6.375 10/01/26 279,936
500 New Jersey St Hsg & Mtg Fin Agy Rev Home Buyer Ser
O (MBIA Insd) ...................................... 6.300 10/01/23 515,870
280 New Jersey St Tpk Auth Rev Ser C Rfdg .............. 6.500 01/01/16 314,994
200 Port Auth NY & NJ Cons Ninety Fifth Ser ............ 6.125 07/15/22 209,752
400 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub
Svc Elec & Gas Co Proj C Rfdg (MBIA Insd) .......... 6.200 08/01/30 428,028
300 Union City, NJ (FSA Insd) .......................... 6.375 11/01/10 341,100
----------
12,624,588
----------
</TABLE>
See Notes to Financial Statements
B-58
<PAGE> 781
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
December 31, 1995
- ------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guam 1.7%
$ 250 Guam Govt Ser A .................................. 5.750% 09/01/04 $ 252,185
-----------
Puerto Rico 9.0%
200 Puerto Rico Comwlth Hwy & Tran Auth Hwy Rev
Ser V Rfdg ....................................... 6.625 07/01/12 218,462
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser T .......... 6.375 07/01/24 270,705
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser U Rfdg ..... 6.000 07/01/14 259,975
250 Puerto Rico Elec Pwr Auth Pwr Rev Ser Z Rfdg ..... 5.500 07/01/14 252,120
300 Puerto Rico Pub Bldgs Auth Gtd Pub Edl & Hlth Fac
Ser M Rfdg (FSA Insd) ............................ 5.750 07/01/15 308,511
-----------
1,309,773
-----------
Total Long-Term Investments 97.6%
(Cost $13,204,264) <F1>................................................. 14,186,546
Short-Term Investments at Amortized Cost 2.1%............................. 300,000
Other Assets in Excess of Liabilities 0.3%................................ 39,728
-----------
Net Assets 100%........................................................... $14,526,274
===========
*Zero coupon bond
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is $13,204,264;
the aggregate gross unrealized appreciation is $982,282 and the aggregate
gross unrealized depreciation is $-0-, resulting in net unrealized
appreciation of $982,282.
</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
AAA........... 69.3%
AA............ 2.3
A............. 10.9
BBB........... 13.0
Non-Rated..... 4.5
------
100.0%
======
See Notes to Financial Statements
B-59
<PAGE> 782
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
December 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $13,204,264) (Note 1)........................... $ 14,186,546
Short-Term Investments (Note 1).................................................... 300,000
Cash .............................................................................. 33,430
Receivables:
Interest......................................................................... 311,438
Fund Shares Sold................................................................. 68,171
Unamortized Organizational Expenses (Note 1)....................................... 85,760
--------------
Total Assets................................................................... 14,985,345
--------------
Liabilities:
Payables:
Investments Purchased............................................................ 382,581
Income Distributions ............................................................ 30,014
Accrued Expenses................................................................... 46,476
--------------
Total Liabilities.............................................................. 459,071
--------------
Net Assets......................................................................... $ 14,526,274
==============
Net Assets Consist of:
Capital (Note 3)................................................................... $ 13,807,351
Net Unrealized Appreciation on Investments......................................... 982,282
Accumulated Distributions in Excess of Net Investment Income (Note 1).............. (4,253)
Accumulated Net Realized Loss on Investments....................................... (259,106)
--------------
Net Assets......................................................................... $ 14,526,274
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$5,843,399 and 389,565 shares of capital stock issued and outstanding) (Note 3) $ 15.00
Maximum sales charge (4.75%* of offering price)................................ .75
--------------
Maximum offering price to public............................................... $ 15.75
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $8,218,396
and 548,211 shares of capital stock issued and outstanding) (Note 3)........... $ 14.99
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $464,479
and 30,966 shares of capital stock issued and outstanding) (Note 3)............ $ 15.00
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-60
<PAGE> 783
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest.......................................................................... $ 688,966
--------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$12,135, $72,539 and $3,252, respectively) (Note 6) ........................... 87,926
Investment Advisory Fee (Note 2) ................................................. 72,316
Printing ......................................................................... 52,045
Custody .......................................................................... 38,398
Legal (Note 2).................................................................... 27,255
Amortization of Organizational Expenses (Note 1).................................. 23,988
Audit............................................................................. 21,075
Shareholder Services (Note 2)..................................................... 17,355
Trustees Fees and Expenses (Note 2)............................................... 9,248
Other............................................................................. 7,763
--------------
Total Expenses................................................................ 357,369
Less Fees Waived and Expenses Reimbursed ($72,316 and $196,794, respectively). 269,110
--------------
Net Expenses.................................................................. 88,259
--------------
Net Investment Income............................................................. $ 600,707
==============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................. $ 3,468,286
Cost of Securities Sold ........................................................ (3,639,871)
--------------
Net Realized Loss on Investments (Including realized loss on futures transactions
of $205,953).................................................................... (171,585)
--------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................... (225,534)
End of the Period............................................................... 982,282
--------------
Net Unrealized Appreciation on Investments During the Period...................... 1,207,816
--------------
Net Realized and Unrealized Gain on Investments................................... $ 1,036,231
==============
Net Increase in Net Assets from Operations........................................ $ 1,636,938
==============
</TABLE>
See Notes to Financial Statements
B-61
<PAGE> 784
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year Ended December 31, 1995
and the Period July 29, 1994 (Commencement of Investment Operations)
to December 31, 1994
- --------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................. $ 600,707 $ 146,897
Net Realized Loss on Investments.................................. (171,585) (87,521)
Net Unrealized Appreciation/Depreciation on Investments During
the Period...................................................... 1,207,816 (225,534)
----------------- -----------------
Change in Net Assets from Operations ............................. 1,636,938 (166,158)
----------------- -----------------
Distributions from Net Investment Income.......................... (601,952) (145,652)
Distributions in Excess of Net Investment Income (Note 1)..... (4,253) -0-
----------------- -----------------
Distributions from and in Excess of
Net Investment Income*...................................... (606,205) (145,652)
----------------- -----------------
Net Change in Net Assets from Investment Activities............... 1,030,733 (311,810)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold......................................... 5,834,549 10,259,465
Net Asset Value of Shares Issued Through Dividend Reinvestment.... 296,757 71,306
Cost of Shares Repurchased........................................ (2,307,583) (351,433)
----------------- -----------------
Net Change in Net Assets from Capital Transactions................ 3,823,723 9,979,338
----------------- -----------------
Total Increase in Net Assets...................................... 4,854,456 9,667,528
Net Assets:
Beginning of the Period........................................... 9,671,818 4,290
----------------- -----------------
End of the Period (Including undistributed net investment income
of $(4,253) and $1,245, respectively) ............................ $ 14,526,274 $ 9,671,818
================= =================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period 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................... $ (244,934) $ (48,787)
Class B Shares................... (345,970) (93,517)
Class C Shares................... (15,301) (3,348)
----------------- -----------------
$ (606,205) $ (145,652)
================= =================
</TABLE>
See Notes to Financial Statements
B-62
<PAGE> 785
<TABLE>
<CAPTION>
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class A Shares 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period........................ $ 13.754 $ 14.300
------------ -----------------
Net Investment Income......................................... .792 .295
Net Realized and Unrealized Gain/Loss on Investments.......... 1.253 (.551)
------------ -----------------
Total from Investment Operations................................ 2.045 (.256)
Less Distributions from and in Excess of Net Investment Income
(Note 1)...................................................... .799 .290
------------ -----------------
Net Asset Value, End of the Period.............................. $ 15.000 $ 13.754
============ =================
Total Return*................................................... 15.26% (1.81%)**
Net Assets at End of the Period (In millions)................... $ 5.8 $ 3.0
Ratio of Expenses to Average Net
Assets* (Annualized).......................................... .27% .17%
Ratio of Net Investment Income to
Average Net Assets* (Annualized).............................. 5.43% 5.16%
Portfolio Turnover.............................................. 31.45% 11.00%
* 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 (Annualized)........................................... 2.53% 3.17%
Ratio of Net Investment Income to
Average Net Assets (Annualized)............................... 3.17% 2.17%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-63
<PAGE> 786
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class B Shares 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period........................ $ 13.738 $ 14.300
------------ -----------------
Net Investment Income......................................... .685 .253
Net Realized and Unrealized Gain/Loss on Investments.......... 1.260 (.563)
------------ -----------------
Total from Investment Operations................................ 1.945 (.310)
Less Distributions from and in Excess of Net Investment Income
(Note 1)...................................................... .692 .252
------------ -----------------
Net Asset Value, End of the Period.............................. $ 14.991 $ 13.738
============ =================
Total Return*................................................... 14.43% (2.16%)**
Net Assets at End of the Period (In millions)................... $ 8.2 $ 6.5
Ratio of Expenses to Average Net
Assets* (Annualized).......................................... 1.01% .93%
Ratio of Net Investment Income to
Average Net Assets* (Annualized).............................. 4.73% 4.38%
Portfolio Turnover.............................................. 31.45% 11.00%
* 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 (Annualized)........................................... 3.23% 3.89%
Ratio of Net Investment Income to
Average Net Assets (Annualized)................................. 2.51% 1.41%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-64
<PAGE> 787
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class C Shares 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period........................ $ 13.753 $ 14.300
------------ -----------------
Net Investment Income........................................... .706 .240
Net Realized and Unrealized Gain/Loss on Investments............ 1.233 (.535)
------------ -----------------
Total from Investment Operations................................ 1.939 (.295)
Less Distributions from and in Excess of Net Investment Income
(Note 1)...................................................... .692 .252
------------ -----------------
Net Asset Value, End of the Period.............................. $ 15.000 $ 13.753
============ =================
Total Return*................................................... 14.42% (2.09%)**
Net Assets at End of the Period (In millions)................... $ .5 $ .2
Ratio of Expenses to Average Net
Assets* (Annualized).......................................... 1.00% .91%
Ratio of Net Investment Income to
Average Net Assets* (Annualized).............................. 4.73% 4.39%
Portfolio Turnover.............................................. 31.45% 11.00%
* 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 (Annualized)............ 3.23% 3.85%
Ratio of Net Investment Income to
Average Net Assets (Annualized)................................. 2.50% 1.46%
</TABLE>
**Non-Annualized
See Notes to Financial Statements
B-65
<PAGE> 788
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital New Jersey Tax Free 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 non-diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's investment objective is to provide investors with a high
level of current income exempt from federal income tax and New Jersey gross
income tax, consistent with preservation of capital. The Fund commenced
investment operations on July 29, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" 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. At December 31, 1995, there
were no when issued or delayed delivery purchase commitments.
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.
B-66
<PAGE> 789
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
D. Organizational Expenses-The Fund will reimburse 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 $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
July 28, 1999. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by VKAC are redeemed by the Fund during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income, if any, to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1995, the Fund had an accumulated capital loss
carryforward for tax purposes of $259,106, of which $11,885 and $247,221 will
expire on December 31, 2002 and 2003, respectively. Net realized gains or
losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.
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. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and federal income tax
purposes, 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..... .600 of 1%
Over $500 million...... .500 of 1%
</TABLE>
B-67
<PAGE> 790
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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 $12,100 representing VKAC's cost of providing cash management,
legal and certain shareholder services (prior to July, 1995) to the Fund. All of
this cost has been waived by VKAC.
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 $2,640,
representing ACCESS's cost of providing transfer agency and shareholder services
plus a profit. All of this expense has been assumed by VKAC.
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 $8,000.
At December 31, 1995, VKAC owned 100 shares each of Classes A, B and C.
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.
B-68
<PAGE> 791
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1995, capital aggregated $5,565,936, $7,797,542 and $443,873
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...................... 207,068 $ 2,985,783
Class B...................... 184,393 2,661,480
Class C...................... 12,868 187,286
--------- --------------
Total Sales.................... 404,329 $ 5,834,549
========= ==============
Dividend Reinvestment:
Class A...................... 8,428 $ 122,246
Class B...................... 11,009 159,264
Class C...................... 1,049 15,247
--------- --------------
Total Dividend Reinvestment.... 20,486 $ 296,757
========= ==============
Repurchases:
Class A...................... (41,615) $ (605,336)
Class B...................... (117,446) (1,691,133)
Class C...................... (755) (11,114)
--------- --------------
Total Repurchases.............. (159,816) $ (2,307,583)
========= ==============
</TABLE>
B-69
<PAGE> 792
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1994, capital aggregated $3,063,243, $6,667,931 and $252,454
for Classes A, B and C, respectively. For the period ended December 31, 1994,
transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ---------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................... 221,890 $ 3,146,645
Class B...................... 484,535 6,865,118
Class C...................... 17,462 247,702
-------- -------------
Total Sales.................... 723,887 $ 10,259,465
======== =============
Dividend Reinvestment:
Class A...................... 2,136 $ 29,495
Class B...................... 2,787 38,489
Class C...................... 242 3,322
-------- -------------
Total Dividend Reinvestment.... 5,165 $ 71,306
======== =============
Repurchases:
Class A...................... (8,442) $ (114,327)
Class B...................... (17,167) (237,106)
Class C...................... -0- -0-
-------- -------------
Total Repurchases.............. (25,609) $ (351,433)
======== =============
</TABLE>
B-70
<PAGE> 793
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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.... 0.00% 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
$12,700 and CDSC on the redeemed shares of Classes B and C of approximately
$54,700. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $7,774,416 and
$3,639,871, respectively.
B-71
<PAGE> 794
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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 utilizes futures contracts to manage the portfolio's
effective maturity or duration.
A futures contract is an agreement involving the delivery of a particular
asset on a specified future date at an agreed upon price. The Fund generally
invests in futures on U.S. Treasury Bonds and the Municipal Bond Index and
typically closes the contract prior to the delivery date.
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the contracts
are closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts
- -----------------------------------------------
<S> <C>
Outstanding at December 31, 1994.... 15
Futures Opened...................... 15
Futures Closed...................... (30)
---------
Outstanding at December 31, 1995.... -0-
=========
</TABLE>
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% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $50,800.
B-72
<PAGE> 795
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
Van Kampen American Capital New York Tax Free Income Fund, formerly known as
Van Kampen Merritt New York Tax Free Income Fund (the "Fund"), seeks to provide
investors with high current income exempt from federal, New York State and New
York City income taxes consistent with preservation of capital. The Fund is
designed for investors who are residents of New York for tax purposes. Under
normal market conditions, the Fund attempts to achieve its investment objective
by investing at least 80% of its assets in a portfolio of New York municipal
securities rated investment grade at the time of investment. Investment grade
securities are securities rated BBB or higher by Standard & Poor's Ratings Group
("S&P"), Baa or higher by Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating by another nationally recognized statistical rating
organization ("NRSRO"). Up to 20% of the Fund's total assets may consist of New
York municipal securities rated below investment grade (but not rated lower than
B- by S&P, B3 by Moody's or an equivalent NRSRO) and unrated New York municipal
securities believed by the Fund's investment adviser to be of comparable
quality, which involve special risk considerations. 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-31
Trustees and Officers............................................................ B-36
Investment Advisory and Other Services........................................... B-44
Custodian and Independent Auditors............................................... B-46
Portfolio Transactions and Brokerage Allocation.................................. B-46
Tax Status of the Fund........................................................... B-47
The Distributor.................................................................. B-48
Legal Counsel.................................................................... B-49
Performance Information.......................................................... B-49
Independent Auditors' Report..................................................... B-52
Financial Statements............................................................. B-53
Notes to Financial Statements.................................................... B-61
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 29, 1996.
B-1
<PAGE> 796
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end non-diversified
management investment company. At present, each of the Fund, Van Kampen American
Capital Insured Tax Free Income Fund, Van Kampen American Capital Tax Free High
Income Fund, Van Kampen American Capital Municipal Income Fund, Van Kampen
American Capital Intermediate Term Municipal Income Fund, Van Kampen American
Capital California Insured Tax Free Fund, Van Kampen American Capital Florida
Insured Tax Free Income Fund and Van Kampen American Capital New Jersey Tax Free
Income Fund has been organized as a series of the Trust and have commenced
investment operations. Each of Van Kampen American Capital California Tax Free
Income Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van
Kampen American Capital Missouri Tax Free Income Fund, and Van Kampen American
Capital Ohio Tax Free Income Fund has been organized as a series of the Trust
and have not commenced investment operations. Other series may be organized and
offered in the future. The Fund was originally organized in 1994 under the name
Van Kampen Merritt New York Tax Free Income Fund, as a sub-trust of Van Kampen
Merritt Tax Free Fund, a Massachusetts business trust. The Fund was reorganized
as a series of the Trust and adopted its present name as of July 31, 1995.
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated as of May 10, 1995. 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. The Trust can
issue an unlimited number of shares, par value $0.01 (prior to July 31, 1995,
the shares had no par value). 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.
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. Invest more than 25% of its assets in a single industry; however, 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.
B-2
<PAGE> 797
2. 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.
3. 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.
4. 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.
5. 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 in connection with
Strategic Transactions in accordance with the requirements of the SEC and
the Commodity Futures Trading Commission.
6. 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.
7. 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.
8. 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.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs, except pursuant to
the exercise by the Fund of its rights under agreements relating to
municipal securities.
10. 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 that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions nor any
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the
B-3
<PAGE> 798
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 200%.
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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. 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 an assignment of the
lessee's interest in the leased property, management or disposition of the
property in the event of foreclosure could be costly, time consuming and result
in unsatisfactory recoupment of the Fund's original investment. 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. The Fund will invest in lease obligations which contain
non-appropriation clauses only if such obligations are rated investment grade,
at the time of investment.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract.
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
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period, to prepay at its discretion upon notice to the noteholders the
outstanding principal amount of the notes plus accrued interest. The interest
rate on a floating rate demand note is based on a known lending rate, such as a
bank's prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 20% 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. When market rates of
interest decrease, the change in value of such securities will have a positive
effect on the net asset value of the Fund and when market rates of interest
increase, the change in value of such securities will have a negative effect on
the net asset value of the Fund. Inverse floaters 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 inverse floaters in response to changes in market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposit the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
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.
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. Further, in
connection with the working out or restructuring of a defaulted security, the
Fund may acquire additional securities of the issuer, the acquisition of which
may be deemed to be a loan of money or property. Such additional securities
should be considered speculative with respect to the capacity to pay interest or
repay principal in accordance with their terms.
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The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, 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. The Fund's policy
with respect to investment in illiquid and restricted securities is not a
fundamental policy and may be changed by the Board of Trustees, in consultation
with the Adviser, without obtaining shareholder approval.
LOWER GRADE MUNICIPAL SECURITIES
In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade municipal securities and up to 20% of the Fund's
total assets may be invested in lower grade 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 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 municipal securities is considered generally to be less
liquid than the market for investment grade 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
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resale, the Fund may incur additional risks and costs. Illiquid and restricted
securities are particularly difficult to dispose of.
Lower grade 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
municipal securities and adversely affect the market value of such securities.
In addition, in such circumstances, the ability of issuers of lower grade
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 such
securities and adversely affect the value of the lower grade municipal
securities in the Fund's portfolio and thus the Fund's net asset value. The
secondary market prices of lower grade municipal securities are less sensitive
to changes in interest rates than are those for higher rated 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 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 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 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 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, Moody's or another NRSRO in evaluating 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 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,
below B3 by Moody's or an equivalent rating by another NRSRO, or whose rating
has been withdrawn.
Because issuers of lower grade 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.
SPECIAL CONSIDERATIONS RELATING TO NEW YORK MUNICIPAL SECURITIES
As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New York municipal securities. In
addition, the specific New York municipal securities in which the
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Fund will invest will change from time to time. The Fund is therefore
susceptible to political, economic, regulatory or other factors affecting
issuers of New York municipal securities. The following information constitutes
only a brief summary of a number of the complex factors which may impact issuers
of New York municipal securities and does not purport to be a complete or
exhaustive description of all adverse conditions to which issuers of New York
municipal securities may be subject. Such information is derived from official
statements utilized in connection with the issuance of New York municipal
securities, as well as from other publicly available documents. Such information
has not been independently verified by the Fund, and the Fund assumes no
responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have an adverse impact on the financial condition of such
issuers. The Fund cannot predict whether or to what extent such factors or other
factors may affect the issuers of New York municipal securities, the market
value or marketability of such securities or the ability of the respective
issuers of such securities acquired by the Fund to pay interest on or principal
of such securities. The creditworthiness of obligations issued by local New York
issuers may be unrelated to the creditworthiness of obligations issued by the
State of New York, and there is no responsibility on the part of the State of
New York to make payments on such local obligations. There may be specific
factors that are applicable in connection with investment in the obligations of
particular issuers located within New York, and it is possible the Fund will
invest in obligations of particular issuers as to which such specific factors
are applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of New York municipal securities.
The portfolio of the Fund may include municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") or by other
entities located within the State, including the City of New York (the "City")
and political subdivisions thereof or their agencies.
NEW YORK STATE ECONOMIC BACKGROUND. New York State is the third most populous
state in the nation and has a relatively high level of personal wealth. The
State's economy is diverse, with a comparatively large share of the nation's
finance, insurance, transportation, communications and services employment, and
a very small share of the nation's farming and mining activity. The State's
location and its excellent air transport facilities and natural harbors have
made it an important link in international commerce. Travel and tourism
constitute an important part of the economy. Like the rest of the nation, New
York has a declining proportion of its workforce engaged in manufacturing, and
an increasing proportion engaged in service industries.
New York City which is the most populous city in the State and nation and is
the center of the nation's largest metropolitan area, accounts for a large
portion of the State's population and personal income. It is headquarters for
the nation's securities business and for a major portion of the nation's major
commercial banks, diversified financial institutions, and life insurance
companies. In addition, the City houses the home offices of the three major
radio and television broadcasting networks, most of the national magazines and a
substantial portion of the nation's book publishers. The City also retains
leadership in the design and manufacture of men's and women's apparel.
While the State has historically been one of the wealthiest in the nation for
decades, the State has grown more slowly than the nation as a whole, gradually
eroding its relative economic affluence. Statewide, urban centers have
experienced significant changes involving migration of the more affluent to the
suburbs and an influx of generally less affluent residents. Regionally, the
older Northeast cities have suffered because of the relative success that the
South and the West have had in attracting people and business. The City has also
had to face greater competition as other major cities have developed financial
and business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in the City.
The State has for many years had a very high state and local tax burden
relative to other states. Although the State ranks 22nd in the nation for its
state tax burden, the State has the second highest combined state and local tax
burden in the United States. In prior years, the State described its state and
local tax burden in per capita terms. For example, in 1991, total state and
local taxes in the State were $3,349 per capita, compared with $1,475 per capita
in 1980; and between 1980 and 1991, state and local taxes per capita increased
127 percent in the State, compared with 111 percent across the nation. DOB
believes, however, that it is more informative to describe the state and local
tax burden in terms of its relationship to personal income. In 1992,
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total state and local taxes in the State were $154.70 per $1,000 of personal
income, compared with $152.70 in 1980. Between 1980 and 1992, state and local
taxes per $1,000 of personal income increased at a slower rate in the State than
in the nation as a whole with such taxes in the State increasing by 1.3 percent
while such taxes increased 4 percent in the nation. The burden of state and
local taxation, in combination with the many other causes of regional economic
dislocation, may have contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State.
To stimulate economic growth, the State has developed programs, including the
provision of direct financial assistance, designed to assist businesses to
expand existing operations located within the State and to attract new
businesses to the State. In addition, the State has provided various tax
incentives to encourage business relocation and expansion. These programs
include direct tax abatements from local property taxes for new facilities
(subject to locality approval) and investment tax credits that are applied
against the state corporation franchise tax. Furthermore, the State has created
forty "economic development zones" in economically distressed regions of the
State. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones.
The 1995-96 budget reflects significant additional actions to reduce the
burden of state taxation, including adoption of a 3-year, 20 percent reduction
in the State's personal income tax and a variety of more modest changes in other
levies. In combination with business tax reductions enacted in 1994, these
actions will reduce state taxes by over $5.5 billion by the 1997-98 fiscal year,
when compared to the estimated yield in that year of the state tax structure as
it applied in 1993-94.
INTRODUCTION
The State's most recent fiscal year commenced on April 1, 1995, and ended on
March 31, 1996, and is referred to herein as the State's 1995-96 fiscal year.
The State's budget for the 1995-96 fiscal year was enacted by the Legislature
on June 7, 1995, more than two months after the start of the fiscal year. Prior
to adoption of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1995-96 fiscal year was formulated on June 20, 1995 and
is based on the State's budget as enacted by the Legislature and signed into law
by the Governor. The State Financial Plan is updated quarterly pursuant to law
in July, October and January. Projections in this Section are based on the
October 27, 1995 update.
The 1995-96 budget is the first to be enacted in the administration of the
Governor, who assumed office on January 1, 1995. It is the first budget in over
half a century which proposed and, as enacted projects an absolute
year-over-year decline in General Fund disbursements. Spending for State
operations is projected to drop even more sharply, by 4.6 percent. Nominal
spending from all State funding sources (i.e., excluding Federal aid) is
proposed to increase by only 2.5 percent from the prior fiscal year, in contrast
to the prior decade when such spending growth averaged more than 6.0 percent
annually.
In his Executive Budget, the Governor indicated that in the 1995-96 fiscal
year, the State Financial Plan, based on then-current law governing spending and
revenues, would be out of balance by almost $4.7 billion, as a result of the
projected structural deficit resulting from the ongoing disparity between
sluggish growth in receipts, the effect of prior-year tax changes, and the rapid
acceleration of spending growth; the impact of unfunded 1994-95 initiatives,
primarily for local aid programs; and the use of one-time solutions, primarily
surplus funds from the prior year, to fund recurring spending in the 1994-95
budget. The Governor proposed additional tax cuts, to spur economic growth and
provide relief for low and middle-income tax payers, which were larger than
those ultimately adopted, and which added $240 million to the then projected
imbalance or budget gap, bringing the total to approximately, $5 billion.
This gap is projected to be closed in the 1995-96 State Financial Plan based
on the enacted budget, through a series of actions, mainly spending reductions
and cost containment measures and certain reestimates that are expected to be
recurring, but also through the use of one-time solutions. The State Financial
Plan projects (i) nearly $1.6 billion in savings from cost containment,
disbursement reestimates, and other savings in social welfare programs,
including Medicaid, income maintenance and various child and family care
programs;
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(ii) $2.2 billion in savings from State agency actions to reduce spending on the
State workforce, SUNY and CUNY, mental hygiene programs, capital projects, the
prison system and fringe benefits; (iii) $300 million in savings from local
assistance reforms, including actions affecting school aid and revenue sharing
while proposing program legislation to provide relief from certain mandates that
increase local spending; (iv) over $400 million in revenue measures, primarily a
new Quick Draw Lottery game, changes to tax payment schedules, and the sale of
assets; and (v) $300 million from reestimates in receipts.
1995-96 STATE FINANCIAL PLAN
The four governmental fund types that comprise the State Financial Plan are
the General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board. This section discusses first the
General Fund and then the other governmental funds.
GENERAL FUND
The General Fund is the principal operating fund of the State and is used to
account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1995-96 fiscal year, the General Fund is expected to account for
approximately 49 percent of total governmental-fund disbursements and 71 percent
of total State-funded disbursements. General Fund moneys are also transferred to
other funds, primarily to support certain capital projects and debt service
payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the States
1995-96 fiscal year. Total receipts and transfers from other funds are projected
to be $33.037 billion, a decrease of $121 million from total receipts in the
prior fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $32.966 billion, a decrease of $433 million from the total
amount disbursed in the prior fiscal year.
PROJECTED GENERAL FUND RECEIPTS
The PERSONAL INCOME TAX is imposed on the income of individuals, estates and
trusts and is based on Federal definitions of income and deductions with certain
modifications. In 1995, the State enacted a tax-reduction program designed to
reduce, by 20 percent over three years, receipts from the personal income tax.
The tax had remained unchanged since 1989 as a result of annual deferrals of tax
reductions originally enacted in 1987. The tax-reduction program is estimated to
reduce receipts by $515 million in the State's 1995-1996 fiscal year, compared
to tax receipts under the prior rate structure. The maximum rate was reduced to
7.59375 percent for 1995, from the 7.875 percent in effect between 1989 and
1994, and is scheduled under current law to be reduced further to 7.125 percent
in 1996, and 6.85 percent in 1997 and thereafter. In addition to significant
reductions in overall tax rates, the program also includes increases in the
standard deduction, widening tax brackets to increase the income thresholds to
which higher tax rates apply, and modification of certain tax credits.
The projected yield of the tax in the State's 1995-96 fiscal year of $17.193
billion is a decrease of $397 million from reported collections in the State's
1994-95 fiscal year. The decrease reflects both the effects of the tax
reductions noted above and the fact that reported collections in the preceding
year were affected by net refund reserve transactions that buoyed collections in
that year by $862 million that will be unavailable in the State's 1995-96 fiscal
year. Without these changes, the yield of the tax would have grown by more than
$1.0 billion (6 percent), reflecting liability growth for the 1995 tax year
projected at approximately the same rate. The income base for the tax is
projected to rise approximately 5 percent for the 1995 tax year.
USER TAXES AND FEES are comprised of three-quarters of the State four percent
sales and use tax (the balance, one cent, flows to support Local Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage, and auto rental taxes, and a portion of the motor fuel excise levies.
Also included in this category are receipts from the container tax, motor
vehicle registration fees and alcoholic beverage license fees. Beginning in
1993-94, a portion of the motor fuel tax and motor vehicle registration fees and
all of the highway use tax flowed to dedicated transportation funds.
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Receipts in this category in the State's 1995-96 fiscal year are expected to
total $6.675 billion, an increase of $51 million from reported 1994-95 results.
Underlying growth in the continuing sales tax base is forecast to be 3.7
percent, accounting for the increase in the category as a whole. Receipts in
1995-96 are adversely affected by the full-year impact of the repeal of the
hotel occupancy tax, allowance of a vendor's credit under the sales tax and
various other minor tax changes adopted in 1994-95 and part-year effects of
reductions in the diesel motor fuel, container and beer taxes adopted in 1995.
BUSINESS TAXES include franchise taxes based generally on net income of
general business, bank and insurance corporations, as well as
gross-receipts-based taxes on utilities and gallonage-based petroleum business
taxes. Through 1993, these levies had been subject to a 15 percent surcharge
initially imposed in 1990.
Total business tax receipts in the State's 1995-96 fiscal year are projected
at $4.788 billion, a decline of $281 million from reported 1994-95 results. The
decline results from the continuing effects of tax reductions originally enacted
in 1994 and the previously scheduled diversion of additional petroleum business
tax receipts to dedicated transportation funds. These factors outweigh the
modest growth projected in the bases of the continuing tax structure. Included
in the tax reductions enacted last year are a drop in the surcharge rate, a
lowering of the alternative minimum tax rate and a variety of smaller changes to
the tax on general business corporations, as well as several changes to reduce
the burden of the petroleum business tax on selected industries, which were
augmented by 1995 enactments.
OTHER TAXES include estate, gift and real estate transfer taxes, a tax on
gains from the sale or transfer of certain real estate where the total
consideration exceeds $1 million, a pari-mutuel tax and other minor levies.
Total receipts from this category in the State's 1995-96 fiscal year are
projected at $1.073 billion, $35 million less than in the preceding year. The
estimates reflect 1994 and 1995 legislation reducing the burden of the real
property gains tax and the estate tax as well as diversion of a portion of the
real estate transfer tax proceeds to the Environmental Protection Fund.
MISCELLANEOUS RECEIPTS include investment income, abandoned property receipts,
medical provider assessments and certain other license and fee revenues.
Receipts in this category in the State's 1995-96 fiscal year are expected to
total $1.596 billion, an increase of $335 million above the amount received in
the prior State fiscal year.
TRANSFERS FROM OTHER FUNDS to the General Fund consist primarily of tax
revenues in excess of debt service requirements, particularly the one cent sales
tax used to support payments to the LGAC. In the State's 1995-96 fiscal year,
excess sales tax revenues are projected to be $1.341 billion, equal to the
amount received in the 1994-95 fiscal year. All other transfers are projected to
increase by $215 million, primarily reflecting the receipt of $220 million from
the Mass Transportation Operating Assistance Fund.
PROJECTED GENERAL FUND DISBURSEMENTS
GRANTS TO LOCAL GOVERNMENTS is the largest category of General Fund
disbursements, and accounts for 69 percent of overall General Fund resources.
Disbursements from this category are projected to total $23.008 billion in the
1995-96 State Financial Plan, a decrease of $294 million from 1994-95 levels.
Although spending in this category is reduced, direct payments to local
governments, including school aid and revenue sharing are maintained largely at
last year's levels. This category of the State Financial Plan includes $10.836
billion in aid for elementary, secondary, and higher education. Remaining
disbursements primarily support community-based mental hygiene programs,
community and public health programs, local transportation programs, and revenue
sharing.
Significant decreases from the prior year result largely from cost containment
initiatives in Medicaid and other social welfare programs. Payments for Medicaid
from the General Fund are projected to be $506 million lower (9 percent) than in
1994-95. Compared to initial baseline cost projections, Medicaid disbursements
are $1.1 billion lower, resulting primarily from hospital, nursing home and home
care rate reductions and freezes ($313 million), more aggressive fraud and abuse
controls ($120 million), a nursing home assessment and other revenues ($159
million), efficiencies in the home health care program ($93 million),
computerized
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reviews and audits of payment claims ($61 million) and savings from lower
utilization of hospitals and clinics ($150 million).
STATE OPERATIONS spending reflects the administrative costs of operating the
State's agencies, including the prison system, mental hygiene institutions, the
State University system, the Legislature, and the court system. Personal service
costs account for approximately 74 percent of the disbursements made in this
category. State employees will not receive a general salary increase this year
as part of the collective bargaining agreements recently negotiated for the
1995-96 through 1998-99 fiscal years. Collective bargaining agreements have been
ratified by employee bargaining units representing more than one-half of all
State employees subject to such agreements. Negotiations are ongoing with
remaining units.
Disbursements for State operations are projected at $5.920 billion, a decrease
of $389 million. This reflects the impact of a 4.3 percent reduction in the
workforce, including approximately 3,200 layoffs. In addition, the 1995-96
enacted budget achieves significant savings from productivity initiatives, the
abolition of non-critical offices and commissions, and privatization of certain
functions. Most agencies will spend less in 1995-96 than in 1994-95, with the
most significant reductions made in the State University (offset by increases in
tuition). Spending for the Department of Correctional Services increases
modestly, reflecting the impact of the sentencing reform bill adopted by the
Legislation as part of the 1995-96 budget.
GENERAL STATE CHARGES primarily reflect the costs of providing fringe benefits
for State employees, including contributions to pension systems, the employer's
share of social security contributions, employer contributions toward the cost
of health insurance, and the costs of providing worker's compensation and
unemployment insurance benefits. This category also reflects certain fixed costs
such as payments in lieu of taxes, and payments of judgments against the State
or its public officers. Disbursements in this category are projected to total
$2.080 billion in the 1995-96 State Financial Plan, and are virtually unchanged
from the 1994-95 level.
The budgeted amount for general State charges assumes the use of $110 million
from a special reserve for pension supplementation, established in 1970 and
funded through State and local employer contributions in the early 1970's, to
offset the State's pension contribution. The Comptroller, as sole trustee of the
Common Retirement Fund and administrative head of the Retirement System, is in
the process of reviewing the legislation that directs the use of these reserves
to determine whether or not to commence legal proceedings to prevent such
proposed use in the enacted 1995-96 State budget as a violation of the State
Constitution, and there is a substantial likelihood that he will do so. The
Executive considers the proposed use of these reserves to be a credit for
prior-year supplementation payments and, therefore, in compliance with State
Constitution.
DEBT SERVICE is the General Fund for 1995-96 reflects only the $9 million
interest cost of the State's commercial paper program. No cost is included for a
TRAN borrowing, since none is expected to be undertaken.
TRANSFERS TO OTHER FUNDS from the General Fund are made primarily to finance
certain portions of State capital project spending and debt service on long-term
bonds, where these costs are not funded from other sources. Transfers in support
of debt service are projected to total $1.583 billion, an increase of $157
million or 11 percent. This increase is heightened by the use of one-time
reimbursements from other funds in the 1994-95 fiscal year. Transfers in support
of capital projects are projected to total $375 million, an increase of $169
million, which reflects significant investments in both new and ongoing capital
programs. All other transfers are projected to total $78 million, an increase of
$9 million from 1994-95 levels.
SPECIAL CONSIDERATIONS
On October 2, 1995, the State Comptroller released a report entitled
"Comptroller's Report on the Financial Condition of New York State 1995" in
which he identified several risks to the State Financial Plan and reaffirmed his
estimate that the State faces a potential imbalance in receipts and
disbursements of at least $2.7 billion for the State's 1996-97 fiscal year and
at least $3.9 billion for the State's 1997-98 fiscal year.
Uncertainties with regard to both the economy and potential decisions at the
federal level add further pressure on future budget balance in the State.
Specific budget proposals being discussed at the federal level but not included
in the State's current economic forecast would (if enacted) have a
disproportionately negative impact on the longer-term outlook for the State's
economy as compared to other states.
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The Governor is required to submit a balanced budget to the State Legislature
and has indicated he will close any potential imbalance primarily through
General Fund expenditure reductions and without increases in taxes or deferrals
of scheduled tax reductions. It is expected that the State's 1996-97 Financial
Plan will reflect a continuing strategy of substantially reduced State spending,
including agency consolidations, reductions in the State workforce, and
efficiency and productivity initiatives. The DOB intends to update the State
Financial Plan and provide an update to the Annual Information Statement upon
release of the Executive Budget. It is possible that, as a result of early
discussions with staffs of the State Legislature on the financial outlook for
the upcoming State fiscal year (a statutory requirement known as "Quick Start"),
certain information on the 1996-1997 fiscal year projections may become
available in advance of the release of the State Fiscal Year 1996-1997 Executive
Budget.
Special Revenue Funds
Special Revenue Funds are used to account for the proceeds of specific revenue
sources such as Federal grants that are legally restricted, either by the
Legislature or outside parties, to expenditures for specified purposes. Although
activity in this fund type is expected to comprise more than 40 percent of total
government funds receipts and disbursements in the 1995-96 fiscal year, about
three-quarters of that activity relates to Federally-funded programs.
Projected receipts in this fund type total $25.547 billion, an increase of
$1.316 billion over the prior year. Projected disbursements in this fund type
total $26.002 billion, an increase of $1.641 billion over 1994-95 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.209 billion in the
1995-96 fiscal year. Remaining projected spending of $6.793 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority funded from the proceeds of dedicated transportation
taxes, and costs of a variety of self-supporting programs with deliver services
financed by user fees.
Capital Projects Funds
Capital Projects Funds are used to account for the financial resources used
for the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax dollars transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1995-96 fiscal year, activity in these funds
is expected to comprise 7 percent of total governmental receipts and
disbursements.
Disbursements from this fund type are projected to increase by $541 million
over prior-year levels, primarily reflecting higher spending for transportation
and mental hygiene projects. The Dedicated Highway and Bridge Trust Fund is
projected to comprise 23 percent of the activity in this fund type--$936 million
in 1995-96 -- and is the single largest dedicated fund. Projected disbursements
from this dedicated fund reflect an increase
of $80 million over 1994-95 levels. Spending for capital projects with be
financed through a combination of sources: Federal grants (25 percent), public
authority bond proceeds (38 percent), general obligation bond proceeds (9
percent), and current revenues (28 percent). Total receipts in this fund type
are projected at $4.170 billion, not including $364 million expected to be
available form the proceeds of general obligation bonds.
Debt Service Funds
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1995-96 fiscal year. Receipts in these funds in excess of
debt service requirements are transferred to the General Fund and Special
Revenue Funds, pursuant to law.
The Debt Service fund type consists of the General Debt Service Fund, which is
supported primarily by tax dollars transferred from the General Fund, and seven
other funds. In the 1995-96 fiscal year, total
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disbursements in this fund type are projected at $2.506 billion, an increase of
$303 million or 13.8 percent. The transfer from the General Fund of $1.583
billion is expected to finance 63 percent of these payments.
The remaining payments are expected to be financed by pledged revenues,
including $1.794 billion in taxes, $228 million in dedicated fees, and $2.200
billion in patient revenues, including transfers of Federal reimbursements.
After impoundment for debt service, as required, $3.481 billion is expected to
be transferred to the General Fund and other funds in support of State
operations. The largest transfer--$1.761 billion--is made to the Special Revenue
Fund type, in support of operations of the mental hygiene agencies. Another
$1.341 billion in excess sales taxes is expected to be transferred to the
General Fund, following payment of projected debt service on bonds of LGAC.
Ratings. On January 13, 1992, S&P lowered its rating on the State's general
obligation bonds to A- from A stating that it continues to assess the State's
rating outlook as "negative" and that "[n]ear term prospects for significant
economic recovery appear dismal." S&P cited "[c]continued economic
deterioration, chronic operating deficits, mounting GAAP fund balance deficits,
and the legislative statement in seeking permanent and structurally sound fiscal
operations" as factors contributing to the rating reduction. Various agency
debt, State moral obligations, contractual obligations, lease purchase
obligations and state guarantees are also affected by the S&P action. S&P also
continued its negative rating outlook assessment on State general obligation
debt. On April 26, 1993, S&P revised the rating outlook assessment to stable. On
February 14, 1994, S&P raised its outlook to positive and, on December 12, 1994,
confirmed its A- rating. S&P's previous ratings were A from March 1990 to
January 1992, AA- from August 1987 to March 1990 and A+ from November 1982 to
August 1987. On January 6, 1992, Moody's lowered its rating on certain
appropriations-backed debt of the State and its agencies from A to Baa1 noting
"mounting budget deficits, inability of the legislature and the administration
to reach timely agreement on deficit reduction plans for the current fiscal
year, and protracted weakness in the economy." Previously, Moody's lowered its
rating to A on June 6, 1990, its rating having been A1 since May 27, 1986. State
general obligation, State-guaranteed and LGAC bonds retained an A rating but
were placed under review for possible downgrade. On February 3, 1992, Moody's
confirmed its A rating of State general obligation bonds, asserting that the
State's "general credit standing reflects its diverse and substantial economic
base, but this strength is offset by structural imbalance of state finances and
increasing debt levels." On December 12, 1994, Moody's reconfirmed its A rating
on the State's general obligation long-term indebtedness. There is no assurance
that a particular rating will continue for any given period of time or that any
such rating will not be revised downward or withdrawn entirely if, in the
judgment of the agency originally establishing the rating, circumstances so
warrant.
STATE FISCAL REFORM
Local Government Assistance Corporation
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments traditionally funded
through the State's annual seasonal borrowing. The legislation authorized LGAC
to issue its bonds and notes in an amount not in excess of $4.7 billion
(exclusive of certain refunding bonds) plus certain other amounts. Over a period
of years, the issuance of these long-term obligations, which are to be amortized
over no more than 30 years, was expected to eliminate the need for continued
short-term seasonal borrowing. The legislation also dedicated revenues equal to
one-quarter of the four cent State sales and use tax to pay debt service on
these bonds. The legislation also imposed a cap on the annual seasonal borrowing
of the State at $4.7 billion, less net proceeds of bonds issued by LGAC and
bonds issued to provide for capitalized interest, except in cases where the
Governor and the legislative leaders have certified the need for additional
borrowing and provided a schedule for reducing it to the cap. If borrowing above
the cap is thus permitted in any fiscal year, it is required by law to be
reduced to the cap by the fourth fiscal year after the limit was first exceeded.
This provision capping the seasonal borrowing was included as a covenant with
LGAC's bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995-96 State
Financial Plan
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includes no spring borrowing nor did the 1994-95 State Financial Plan, which was
the first time in 35 years there was no short-term seasonal borrowing. This
reflects the success of the LGAC program in permitting the State to accelerate
local aid payments from the first quarter of the current fiscal year to the
fourth quarter of the previous fiscal year.
Long-term Debt Reform
In June 1994, the Legislation passed a proposed constitutional amendment that
would significantly change the long-term financing practices of the State and
its public authorities. The proposed amendment would permit the State, within a
formula-based cap, to issue revenue bonds, which would be debt of the State
secured solely by a pledge of certain State tax receipts (including those
allocated to State funds dedicated for transportation purposes), and not be the
full faith and credit of the State. In addition, the proposed constitutional
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot, (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan, and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented to the voters
for their consideration, it must be passed again by a separately elected
Legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the Senate in June 1995, and the Assembly is expected to
pass the amendment shortly. If approved by the voters, the amendment would be
effective as of January 1, 1996.
1995-96 BORROWING PLAN
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1995-96 fiscal
year. The State expects to issue $248 million in general obligation bonds
(including $70 million for purposes of redeeming outstanding BANs) and $186
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $33 million in COPs during the State's 1995-96
fiscal year for equipment purchases and $14 million for capital purposes. The
projection of the State regarding its borrowings for the 1995-96 fiscal year may
change if circumstances require.
LGAC is authorized to provide net proceeds of up to $529 million during the
State's 1995-96 fiscal year, to redeem notes sold in June 1995, completing its
financing program.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.7 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1994-95
capital projects. Included therein are borrowings by (i) the Dormitory Authority
of the State of New York ("DA") for SUNY, The City University of New York
("CUNY"), and health facilities, (ii) MCFFA or mental health facilities; (iii)
Thruway Authority for the Dedicated Highway and Bridge Trust Fund and
Consolidated Highway Improvement Program; (iv) UDC for prison and youth
facilities and economic development programs; (v) the Housing Finance Agency
("HFA") for housing programs; and (vi) other borrowings by the Environmental
Facilities Corporation ("EFC") and the Energy Research and Development Authority
("ERDA").
OUTSTANDING DEBT OF THE STATE AND CERTAIN AUTHORITIES
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated-tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain types of contingent obligations,
including moral-obligation financing, certain contingent contractual-obligation
financing arrangements, and State-guaranteed debt described above,
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where debt service is expected to be paid from other sources and State
appropriations are contingent in that they may be made and used only under
certain circumstances.
General Obligation Bond Programs
The first type of State-supported debt, general obligation debt, is currently
authorized for three programmatic categories: transportation, environmental and
housing. The State has issued bonds only in the first two categories in recent
years, with the size of the issues generally decreasing as existing
authorizations are diminished. The amount of general obligation bonds and
additional bonds issued as a result of a refunding in March 1995 issued in the
1992-93, 1993-94 and 1994-95 fiscal years, including net increases or decreases
in BANs, has been $757 million, $388 million and $259 million, respectively.
Transportation-related bonds are issued for State highway and bridge
improvements, aviation, highway and mass transportation projects and purposes,
and rapid transit, rail, canal, port and waterway programs and projects.
Environmental bonds are issued to fund environmentally-sensitive land
acquisitions, air and water quality improvements and hazardous waste site
cleanup projects. As of March 31, 1995, the total amount of outstanding general
obligation debt was $5.181 billion, including $149.3 million in BANs.
Lease-Purchase and Contractual-Obligation Financing Programs
The second type of State-supported debt, lease-purchase and
contractual-obligation financing arrangements with public authorities and
municipalities, has been used primarily by the State to finance the State's
highway and bridge program, SUNY and CUNY buildings, health and mental hygiene
facilities, prison construction and rehabilitation, and various other State
capital projects.
Local Government Assistance Corporation
As noted above, LGAC is authorized to issued debt to fund certain payments to
local governments.
Other Financing Obligations
The State has utilized and expects to continue to utilize lease-purchase and
contractual-obligation financing arrangements to finance its capital programs,
in addition to authorized general obligation bonds, pending the adoption of the
proposed constitutional amendment discussed above under the heading "State
Fiscal Reform--Long-term Debt Reform". Some of the major capital programs
financed by lease-purchase and contractual obligation agreements are highlighted
below.
Transportation. The State Department of Transportation is responsible for the
highway and bridge program which maintains 40,0000 lane miles of highways and
7,500 State bridges. Despite $4.1 billion of general obligation bond
authorizations since 1983, of which $3.3 billion has been issued, many of the
bridges, which were built in the 1930's, and the extensive interstate, primary,
and urban highway system built in the 1960's have deteriorated and are in need
of increased levels of maintenance.
Legislation enacted in 1991 established the Dedicated Highway and Bridge Trust
Fund to provide for the dedication of a portion of the petroleum business tax
and certain other transportation-related taxes and fees for highway and bridge
improvements over the next several years with an estimated $2.868 billion of
bonds issued by the New York State Thruway Authority. This Authority has also
issued and is authorized to continue to issue Local Highway and Bridge bonds to
finance the capital portion of the State's local highway assistance programs.
The State has supported the capital plans of the Metropolitan Transportation
Authority ("MTA") in part by entering into service contracts relating to certain
bonds issued by the MTA. Legislation adopted in 1992 and 1993 also authorized
payments, subject to appropriation, of a portion of the petroleum business tax
from the State's Dedicated Mass Transportation Trust Fund to the MTA and
authorized it to be used as a source of payment for bonds to be sold by the MTA
to support its 1992-96 Capital Program.
Education. The State finances the physical infrastructure of SUNY and CUNY and
their respective community colleges and the State Education Department through
direct State capital spending and through financing arrangements with the
Dormitory Authority of the State of New York, paying all capital costs of the
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senior colleges and sharing equally with local governments for the community
colleges, except that SUNY dormitories are financed through dormitory fees.
The 34 SUNY campuses include more than 1,700 classroom, dormitory, library,
athletic, and student buildings of which 68 percent are over 20 years of age.
Together with the 30 SUNY community colleges, the SUNY system serves 300,000
full-time students. The CUNY system is comprised of 11 senior colleges and 6
community colleges that serve approximately 158,000 full-time students.
Mental Hygiene. The State provides care for its citizens with mental illness,
mental retardation, and developmental disabilities, and for those with chemical
dependencies, through Offices of the Department of Mental Hygiene. Historically,
this care had been provided mainly in large State institutions, although more
recently, the State has adopted policies that provide institutional care only to
the neediest and has expanded care in community residences. The Office of Mental
Retardation has closed 10 of its 20 developmental centers and plans to close
more by the end of fiscal 1995-96. The Office of Mental Health ("OMH") has
reduced its adult institutional population from 22,000 in 1982 to 10,000 today
and projects a long-range population of 6,600.
The OMH institutions will continue to require substantial capital investments
to upgrade to Federal standards those that remain open. Community facility
development will also require substantial capital investments as
deinstitutionalization is implemented. Both programs are primarily supported by
patient revenues through financing arrangements with MCFFA.
Corrections. During the 10-year period 1983-92, the State's prison system more
than doubled in size due to the unprecedented increase in demand for prison
space driven by the war on drugs and related criminal justice initiatives.
Today, the system houses approximately 68,000 inmates in over 69 facilities with
3,000 buildings comprising over 32 million square feet. As the need to build new
structures to create capacity abated in the early 1990's, the focus of the
Department of Correctional Services ("DOCS") capital program shifted from
expansion to the increasing need for rehabilitation. This need is driven by the
age of the State's older prisons, health needs of the inmate population, and the
fact that much of the "new" capacity was adaptive re-use of older Department of
Mental Hygiene facilities and not new construction. The DOCS capital program
will concentrate on high-priority renovation projects and replacement of
deteriorated structures, while ensuring all housing, medical, program and
support space remains functional, safe and secure. This program is financed
through lease-purchase financing arrangements with UDC.
Other Programs. The State also uses lease-purchase and contractual-obligation
financing arrangements for capital programs of the Department of Health's
hospitals, Roswell Park Cancer Institute, and the David Axelrod Institute for
Public Health; the Division for Youth's institutional facilities and Youth
Opportunity Centers; the State's housing programs; and various environmental,
economic development, and State building programs.
Litigation. The State is a defendant in numerous legal proceedings pertaining
to matters incidental to the performance of routine governmental operations.
Such litigation includes, but is not limited to, claims asserted against the
State arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and federal laws. Included in
the State's outstanding litigation are a number of cases challenging the
constitutionality or the adequacy and effectiveness of a variety of significant
social welfare programs primarily involving the State's health and mental
hygiene programs. Adverse judgments in these matters generally could result in
injunctive relief coupled with prospective changes in patient care which could
require substantial increased financing of the litigated programs in the future.
Insurance Law
Two cases challenge provisions of Section 2807-c of the Public Health law,
which impose a 13 percent surcharge on inpatient hospital bills paid by
commercial insurers and employee welfare benefit plans, and portions of Chapter
55 of the Laws of 1992 which require hospitals to impose and remit to the State
an 11 percent surcharge on hospital bills paid by commercial insurers and which
require health maintenance organizations to remit to the State a surcharge of up
to 9 percent. In The Travelers Insurance Company v. Cuomo, et al., commenced
June 2, 1992, and The Health Insurance Association of America, et al. v.
Chassin,
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et al., commenced July 20, 1992, both in the United States District Court for
the southern District of New York and consolidated, plaintiffs allege that the
surcharges are preempted by Federal law. By decision dated April 26, 1995, the
United States Supreme Court upheld the surcharges as not preempted by Federal
law.
In Trustees of and The Pension, Hospitalization Benefit Plan of the Electrical
Industry, et al., v. Cuomo, et al., commenced November 25, 1992 in the United
States District Court for the Eastern District of New York, plaintiff employee
welfare benefit plans seek a declaratory judgment nullifying on the ground of
Federal preemption provisions of Section 2807-c of the Public Health Law and
implementing regulations which impose a bad debt and charity care allowance on
all hospital bills and a 13 percent surcharge on inpatient bills paid by
employee welfare benefit plans. By order and stipulation of the District Court
dated September 21, 1995, the action has been discontinued.
Lottery
In Music, Cigarette & Amusement Association, Inc., et al. v. Lynch, et al.
(Supreme Court, Kings County, commenced August 1995) and Trump v. Perlee, et al.
(Supreme Court, New York county, commenced August 1995), petitioners challenge
as unconstitutional and seek to enjoin "Quick Draw," a game of the State
Division of the Lottery. Petitioners contend that Sections 94-a through 94-g of
Ch. 2 L. 1995, which authorize "Quick Draw," violate Article I sec.9 of the
State Constitution. This constitutional provision bars gambling but allows
lotteries operated by the State. Petitioners contend that "Quick Draw" is not a
lottery as contemplated by Article I sec.9.
Retirement System
In McCall, et al. v. State of New York, et al., commenced July 5, 1995
(Supreme Court, Albany County), an action for a declaratory judgement and
injunctive relief, plaintiffs (including the State Comptroller) contend that
certain provisions of Ch. 199 L. 1995 are unconstitutional. Ch. 119 L. 1995
provides enhanced supplemental pension allowances for members of the state and
local retirement systems. Plaintiffs contend that Section 13 of Ch. 119 L. 1995,
which provides that money in a Supplemental Reserve Fund shall be used as a
credit in the state's 1995-96 fiscal year against prior State and local pension
contributions, violates Article V sec.7 of the state Constitution. This
constitutional provision bars the diminishment or impairment of the benefits of
membership in the retirement systems.
Tax Law
Aspects of petroleum business taxes are the subject of administrative claims
and litigation (e.g., Tug Buster Bouchard, et al. v. Wetzler, Supreme Court,
Albany County, commenced November 13, 1992). In Tug Buster Bouchard, petitioner
corporations, which purchase fuel out of State and consume such fuel within the
state, contend that the assessment of the petroleum business tax pursuant to Tax
Law sec.301 to such fuel violates the Commerce Clause of the United States
Constitution. Petitioners contend that the application of Section 301 to the
interstate transaction but not to purchasers who purchase and consume fuel
within the State discriminates against interstate commerce.
Medicaid
Several cases challenge the rationality and the retroactive application of
State regulations recalibrating nursing home Medicaid rates. Following
invalidation of such previous regulations by the Court of Appeals, The state
Department of Health in 1991 promulgated new recalibration regulations, 10 NYCRR
sec.86-2.31(a) and (b), for 1989-1991 and 1992 and subsequent rate years,
respectively. In Matter of New York Association of Homes and Services for the
Aging, Inc. v. Commissioner (Supreme Court, Albany County; Index No. 3885-92),
by decision dated June 30, 1994, the Court of Appeals held invalid the
Department's retroactive application to rate years 1989 through 1991 of the
nursing home Medicaid reimbursement rate recalibration adjustment set forth in
10 NYCRR sec.86-2.3(a). Matter of New York Association of Homes and Services for
the Aging, Inc. v. Commissioner (Supreme Court Albany County; Index No.
4370-92), challenges the new recalibration regulations for rate years commencing
1992, and is pending.
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In Matter of New York State Health Facilities Association, Inc. et al. v.
Axelrod, Supreme Court, Albany County, commenced 1990, petitioner nursing homes
challenge regulations of the State Department of Health, 10 NYCRR sec.86-2.10
(c) and (d), which reduce base prices for the direct and indirect components of
Medicaid reimbursement for rate years commencing 1989.
In a consolidated action commenced in 1992, Medicaid recipients and home
health care providers and organizations challenge promulgation by the State
Department of Social Services ("DSS") in June 1992 of a home assessment resource
review instrument ("HARRI"), which is to be used by DSS to determine eligibility
for an the nature of home care services for Medicaid recipients, and challenge
the policy of DSS of limiting reimbursable hours of service until a patient is
assessed using the HARRI (Dowd, et al. v. Bane, Supreme Court, New York County).
Office of Mental Health Patient-Care Costs
Two actions, Balzi, et al. v. Surles, et al., commenced in November 1985 in
the United States District Court for the Southern District of New York, and
Brogan, et al. v. Sullivan, et al.,commenced in May 1990 in the United States
District Court for the Western District of New York, now consolidated, challenge
the practice of using patients' Social Security benefits for the costs of care
of patients of State Office of Mental Health facilities.
Shelter Allowance
In an action commenced in March 1987 against State of New York City officials
(Jiggetts, et al. v. Bane, et al.), plaintiffs allege that the shelter allowance
granted to recipients of public assistance is not adequate for proper housing.
In an action commenced in 1985 (United States, et al. v. Yonkers Board of
Education, et al.), the United States District Court for the Southern District
of New York found that Yonkers and its public schools were intentionally
segregated. Yonkers enacted an "education improvement plan" which was adopted in
1986. Plaintiffs allege that defendants have not fulfilled their responsibility
to alleviate the segregation. On January 19, 1989 the State, the State Education
Department and the New York State Urban Development Corporation were added as
defendants.
REAL PROPERTY CLAIMS
Indian Land Claims
On March 4, 1985 in Oneida Indian Nation of New York, et al. v. County of
Oneida, the United States Supreme Court affirmed a judgment of the United States
Court of Appeals for the Second Circuit holding that the Oneida Indians have a
common-law right of action against Madison and Oneida Counties for wrongful
possession of 872 acres of land illegally sold to the State in 1795. At the same
time, however, the Court reversed the Second Circuit by holding that a
third-party claim by the counties against the State for indemnification was not
properly before the Federal courts. The case was remanded to the District Court
for an assessment of damages, which action is still pending. The counties may
still seek indemnification in the State courts.
Several other actions involving Indian claims to land in upstate New York are
also pending. Included are Cayuga Indian Nation of New York v. Cuomo, et al.,
and Canadian St. Regis Band of Mohawk Indians, et al. v. State of New York, et
al., both in the United States District Court for the Northern District of New
York. The Supreme Court's holding in Oneida Indian Nation of New York may impair
or eliminate certain of the State's defenses to these actions but may enhance
others.
CONTRACT AND TORT CLAIMS
Cogeneration Facility
In Inter-Power of New York, Inc. v. State of New York, commenced November 16,
1994 in the Court of Claims, plaintiff alleges that by reason of the failure of
the State's Department of Environmental Conservation
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to provide in a timely manner accurate and complete data, plaintiff was unable
to complete by the projected completion date a cogenerational facility, and
thereby suffered damages.
NEW YORK CITY. The fiscal health of the State is closely related to the fiscal
health of its localities, particularly the City, which has required and
continues to require significant financial assistance from the State. The City
accounts for approximately 41% of the State's population and personal income.
In February 1975, the UDC, which had approximately $1 billion of outstanding
debt, defaulted on certain of its short-term notes. Shortly after the UDC
default, the City entered a period of financial crisis from which it is only now
emerging. Both the State Legislature and the United States Congress enacted
legislation in response to this crisis. During 1975, the State Legislature (i)
created the Municipal Assistance Corporation for the City of New York ("MAC") to
assist with long-term financing for the City's short-term debt and other cash
requirements and (ii) created the New York State Financial Control Board (the
"Control Board") to review and approve the City's budgets and City four-year
financial plans (the financial plans also apply to certain City-related public
agencies (the "Covered Organizations")). If the City were to experience certain
adverse financial circumstances, including the occurrence or the substantial
likelihood and imminence of the occurrence of an annual operating deficit of
more than $100 million or the loss of access to the public credit markets to
satisfy the City's capital and seasonal financing requirements, the Control
Board would be required by State law to exercise certain powers.
The severe financial difficulties encountered by the City in 1975 caused it to
lose access to the public credit market. At that time, the City was incurring
substantial operating deficits and employing financial and accounting practices
which were widely criticized. Since that time, the City benefited substantially
from financial assistance provided through a combination of Federal, state and
private measures and the City has extensively revised its financial systems and
accounting practices. Since 1978, the City's annual financial statements have
been required to be prepared in accordance with generally accepted accounting
principles ("GAAP") and audited by independent certified public accountants. For
each of the 1981 through 1995 fiscal years, the City achieved balanced operating
results as reported in accordance with GAAP and the City's 1996 fiscal year
results are projected to be balanced in accordance with GAAP.
The Financial Plan. The City prepares a four-year annual financial plan, which
is reviewed and revised on a quarterly basis and which includes the City's
capital, revenue and expense projections and outlines proposed gap-closing
programs for years with projected budget gaps. The Mayor is responsible for
preparing the City's four-year financial plan, including the City's current
financial plan for the 1996 through 1999 fiscal years (the "Financial Plan").
The City is required to submit its financial plans to review bodies, including
the Control Board.
The City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies include the condition
of the regional and local economies, the impact on real estate tax revenues of
the real estate market, wage increases for City employees consistent with those
assumed in the Financial Plan, employment growth, the ability to implement
proposed reductions in City personnel and other cost reduction initiatives,
which may require in certain cases the cooperation of the City's municipal
unions, the ability of the New York City Health and Hospitals Corporation
("HHC") and the Board of Education ("BOE") to take actions to offset reduced
revenues, the ability to complete revenue generating transactions, provision of
State and Federal aid and mandate relief and the impact on City revenues of
proposals for Federal and State welfare reform. The City Comptroller and other
agencies and public officials have issued reports and made public statements
which, among other things, state that projected revenues may be less and future
expenditures may be greater than those forecast in the City's Financial Plan.
Implementation of the Financial Plan is also dependent upon the City's ability
to market its securities successfully. The City's financing program for fiscal
years 1996 through 1999 contemplates the issuance of $11.8 billion of general
obligation bonds primarily to reconstruct and rehabilitate the City's
infrastructure and physical assets and to make other capital investments. In
addition, the City issues revenue and tax anticipation notes to finance its
seasonal working capital requirements. The success of projected public sales of
City bonds and notes will be subject to prevailing market conditions and no
assurance can be given that such sales will be
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completed. If the City were unable to sell its general obligation bonds and
notes, it would be prevented from meeting its planned operating and capital
expenditures. Future developments concerning the City and public discussion of
such developments, as well as prevailing market conditions, may affect the
market for outstanding City general obligation bonds and notes.
Action to Close Budget Gaps. The City was required to close substantial budget
gaps in recent years in order to maintain balanced operating results. For fiscal
year 1995, the City adopted a budget which halted the trend in recent years of
substantial increases in City-funded spending from one year to the next. There
can be no assurance that the City will continue to maintain a balanced budget as
required by State law, without additional tax or other revenue increases or
additional reductions in City services or entitlement programs, which could
adversely affect the City's economic base.
The Financial Plan projects substantial initial gaps between projected
revenues and expenditures of $2.0 billion, $3.3 billion and $4.1 billion for the
1997, 1998 and 1999 fiscal years, respectively. The financial plan also reflects
a program of proposed actions by the City, State and Federal governments to
close these gaps. City gap-closing actions, a substantial number of which are
unspecified, include additional spending reductions, reduction in entitlements,
State and Federal aid, privatization initiatives and the assumed receipt of
revenues relating to rent payments for the City's airports, which are currently
the subject of a dispute with the Port Authority of New York and New Jersey. The
City is also preparing a $200 million contingency agency reduction program for
the 1997 fiscal year (the "Port Authority").
The City's projected budget gaps for the 1998 and 1999 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1997 budget are not taken into account in projecting the budget gaps
for the 1998 and 1999 fiscal years.
Various actions proposed in the Financial Plan, including the amount of State
aid, are subject to approval by the Governor and the State Legislature, and the
proposed amount of Federal aid is subject to approval by Congress and the
President. Reductions in entitlement expenditures will depend to a significant
extent on the ultimate resolution of State and Federal budget proposals
currently being considered. No assurance can be given that such actions will in
fact be taken or that the savings that the City projects will result from these
actions will be realized. If these measures cannot be implemented, the City will
be required to take other actions to decrease expenditures or increase revenues
to maintain a balanced financial plan.
Certain Reports. From time to time, the Control Board staff, MAC, the Office
of the State Deputy Comptroller for the City of New York ("OSDC"), the City
Comptroller and others issue reports and make public statements regarding the
City's financial condition, commenting on, among other matters, the City's
financial plans, projected revenues and expenditures and actions by the City to
eliminate projected operating deficits. Some of these reports and statements
have warned that the City may have underestimated certain expenditures and
overestimated certain revenues and have suggested that the City may not have
adequately provided for future contingencies. Certain of these reports have
analyzed the City's future economic and social conditions and have questioned
whether the City has the capacity to generate sufficient revenues in the future
to meet the costs of its expenditure increases and to provide necessary
services. It is reasonable to expect that such reports and statements will
continue to be issued and to engender public comment.
On February 29, 1996, the staff of the City Comptroller issued a report on the
Financial Plan. The report projects that there remains $408 million to $528
million in budget risks for the 1996 fiscal year, before taking into account the
availability of $160 million in the General Reserve. The principal risks for the
1996 fiscal year identified in the report include $140 million to $190 million
of uncertain revenues and projected savings at BOE and the receipt by the City
of $100 million to $130 million from a proposed MAC refunding. The report also
expressed concern as to whether the required regulatory approval for the sale of
the City's television station would be received before the end of the 1996
fiscal year.
With respect to the 1997 fiscal year, the report states that the Financial
Plan includes total risks of between $2.05 billion and $2.15 billion. The report
notes that the gap-closing program for the 1997 fiscal year assumes the
implementation of highly uncertain State and Federal actions that would provide
between $1.2 billion and $1.4 billion in relief to the City resulting from
proposed public assistance and medical assistance entitlement
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reductions, a proposed increase in Federal Medicaid reimbursements, additional
State aid and various privatization proposals. The report concludes that it is
unlikely that the City will be able to implement most of these initiatives due
to Federal and State budget difficulties. Additional risks for the 1997 fiscal
year identified in the report include (i) risks attributable to BOE relating to
unspecified additional State aid, unspecified expenditure reductions and
proposals to reduce special education spending, which total $415 million,
without taking into account potential reductions that will likely take place
upon adoption of the Federal and State budgets; (ii) proposals for the sale of
parking meters and other assets; and (iii) the receipt of $244 million to $294
million of lease payments from the Port Authority for the City's airports.
The report concluded that the magnitude of the budget risk for the 1997 fiscal
year, after two years of large agency cutbacks and work force reductions,
indicates the seriousness of the City's continuing budget difficulties, and that
the Financial Plan will require substantial revision in order to provide a
credible program for dealing with the large projected budget gap for the 1997
fiscal year. The report further notes that the relative weakness of the national
and City economies makes it unlikely that new jobs and business expansion will
generate significant additional tax revenues and that proposed Federal and State
reductions in funding will reduce the levels of intergovernmental assistance for
the City.
On March 6, 1996, the staff of the OSDC issued a report on the Financial Plan.
The report concluded that there remained a budget gap for the 1996 fiscal year
of $44 million, which can be closed with the $200 million General Reserve, and
additional significant risks totalling $507 million involving actions which
require the approval of the State and Federal governments or other third
parties. These risks include (i) potential delays in the sale of the City's
television station; (ii) shortfalls in projected resources from MAC; and (iii)
shortfalls of $100 million in projected State education aid and $50 million in
projected Federal assistance. In addition, the report expressed concern that (i)
the City may have to write off a portion of approximately $300 million in State
education aid that was included as revenue in prior years' budgets, since the
State has not made payment and neither the current nor the proposed State budget
include an appropriation sufficient to cover most of this liability, and (ii)
the City must complete two transactions before the end of the fiscal year, the
sale of property tax liens and housing mortgages, that together are expected to
produce resources of $267 million.
The report also concluded that the gap for the 1997 fiscal year could be $544
million greater than the City's projected budget gap of $2 billion, primarily
due to the failure of BOE to specify $304 million of expenditure reductions or
additional resources necessary to bring its spending in line with the resources
allocated to it in the Financial Plan. In addition, the report noted that
gap-closing proposals set forth in the Financial Plan totalling $1.6 billion are
at high risk of falling short of target. The proposals identified in the report
as high risk include (i) $800 million in expected State and Federal assistance,
primarily from savings in social service entitlement programs, which are
dependent on the ultimate resolution of the Federal and State budgets; (ii) $300
million from initiatives to privatize parking meters and other City assets;
(iii) $244 million to be received from the Port Authority as retroactive lease
payments for the City's two airports; and (iv) $181 million in spending cuts for
BOE. Moreover, the report expressed concern that the potential for budget cuts
at BOE could exceed $1 billion after taking into account the possible loss of
$453 million in proposed reductions in State and Federal funding. The report
also stated that non-recurring resources for the 1996 fiscal year have increased
to over $1.7 billion, approaching the unprecedented $2 billion used in the 1995
fiscal year, and that one-third of the 1997 fiscal year gap-closing program
already relies on one-time resources.
With respect to the economy, the report noted that, in a time of slow economic
growth, revenues continue to stagnate, and that the City's economic forecast,
which is premised on sluggish national growth, does not reflect the potential
for a national recession during the four years of the Financial Plan. In
addition, the report expressed concern that the City's economy, and City and
State tax revenues, are closely tied to swings in the financial markets, such as
rising interest rates, which sharply reduced the profits of securities firms in
1994, and rising equity markets, which raised personal income and business tax
collections in 1995, as well as economic conditions in Europe and Japan, which
are currently weak.
The report noted that Federal and State assistance is likely to be
significantly reduced and that there is little potential for significant new
revenues beyond those already reflected in the Financial Plan. The report
concluded that, despite the City's success in work force reduction and
entitlement savings, the Financial Plan shows an increasing imbalance between
the City's recurring revenues and expenditures.
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On December 12, 1995, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be reduced in future
years. The report noted that, under the State constitution, the City is
permitted to issue debt in an amount not greater than 10% of the average full
value of taxable real estate for the current year and preceding four years. The
report concluded that, if the value of taxable real property in each of 1998 and
1999 fiscal years continues to decline, reflecting the continuing trend of lower
values of taxable property, the City would have to continue to curtail its
capital program from the levels projected in the Financial Plan to remain within
the legal debt-incurring limit in those years. The City Comptroller recommended
that the City prioritize and improve the efficiency and administration of its
current capital plan to determine which capital projects can be delayed or
cancelled to further reduce capital expenditures and thus debt service over the
course of the Financial Plan.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a "flat" tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
Collective Bargaining Agreements. Substantially all of the City's full-time
employees are members of labor unions. State law requires that all collective
bargaining agreements entered into by the City and the Covered Organizations be
consistent with the City's current financial plan, except for certain awards
arrived at through the impasse procedure of the New York City Collective
Bargaining Law, described below. Contracts with all of the City's municipal
unions expired in the 1995 and 1996 fiscal years. In November 1995, the City
announced a tentative settlement with unions representing approximately
two-thirds of the City's workforce. The Financial Plan reflects the costs of the
tentative settlements and assumes similar increases for all other City-funded
employees.
The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement. Legislation passed on February 1996 will place collective
bargaining matters relating to police and firefighters, including impasse
proceedings, under the jurisdiction of the State Public Employment Relations
Board ("PERB"), instead of the New York City Office of Collective Bargaining
("OCB"), OCB considers wage levels of municipal employees in similar cities in
the United States in reaching its determinations, while PERB's determinations
take into account wage levels in both private and public employment in
comparable communities, particularly within the State. In addition, PERB can
approve only two-year contracts, unlike OCB which can approve longer contracts.
For these reasons, among others, PERB jurisdiction could result in labor
settlements which impose higher costs on the City than those reached under
excising procedures. On January 23, 1996, the City requested the Office of
Collective Bargaining to declare impasse against the PBA and the UFA. In
addition, on February 29, 1996, the City commenced an action in the State
Supreme Court seeking a declaratory judgment confirming that OCB, rather than
PERB, has jurisdiction over collective bargaining matters relating to police.
The Financial Plan includes $511 million in the 1996 fiscal year, $489 million
in the 1997 fiscal year and $200 million in the 1998 fiscal year for
transitional savings initiatives developed in conjunction with the municipal
labor unions. On November 17, 1995, the City and union leadership announced
agreement on $476 million in such savings in the 1996 fiscal year, $489 million
in the 1997 fiscal year and $200 million in savings in the 1998 fiscal year
based on the tentative settlement with the unions representing approximately
two-thirds of the City's workforce. Of the $476 million that has been
identified, $200 million will result from
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health program savings, $150 million from reduced pension contributions, $81
million from a one-time reduction of welfare fund contributions which will be
paid by the City in fiscal year 2000 and $40 million from payroll and fringe
benefit savings associated with early retirement.
Litigation. The City is a defendant in a significant number of lawsuits. Such
litigation includes, but is not limited to, actions commenced and claims
asserted against the City arising out of alleged constitutional violations,
alleged torts, alleged breaches of contracts and other violations of law and
condemnation proceedings. While the ultimate outcome and fiscal impact, if any,
on the City of the proceedings and claims are not currently predictable, adverse
determination in certain of them might have a material adverse effect upon the
City's ability to carry out the Financial Plan. As of June 30, 1995, the City
estimated its potential future liability on account of all outstanding claims to
be approximately $2.5 billion.
On March 1, 1994, proposed legislation enabling Staten Island to separate from
the City was submitted to the State Legislature. Separation would take effect
upon approval of such enabling legislation. Based upon the advice of the State
Assembly's "home rule" counsel, the Speaker of the Assembly has determined that
the City must issue a "home rule message," which requires a formal request of
action by the State Legislature by either (i) the Major and a majority of the
City Counsel or (ii) two-thirds of the City Council, before the proposed
legislation may be voted upon by the Assembly. In June 1994, a proceeding was
commenced by the members of the Assembly representing Staten Island against the
speaker and the Assembly "home rule" counsel challenging the validity of their
determination and seeking to have it rescinded. On January 17, 1995, the State
Supreme Court, Albany County, dismissed the petition. On February 22, 1996, the
Appellate Division, Third Department affirmed the dismissal. If any such
enabling legislation were passed, it may be subject to legal challenge and would
require approval by the United States Department of Justice under the Federal
Voting Rights Act. It cannot be determined at this time what the content of such
proposed legislation will be, whether it will be enacted into law by the State
Legislature, and if so, what legal challenges might be commenced contesting the
validity of such legislation.
Outstanding Indebtedness. As of December 31, 1995, the City had $24.386
billion of outstanding net long-term indebtedness. As of December 31, 1995, MAC
had $3.933 billion of outstanding net long-term indebtedness.
Ratings. As of March 1, 1996, Moody's rated the City's general obligation
bonds Baa1, but stated that its rating remains under review pending the outcome
of the adoption of the City's budget for the 1997 fiscal year and in light of
the status of the debate on public assistance and Medicaid reform; the enactment
of a State budget, upon which major assumptions regarding State aid are
dependent, which may be extensively delayed; and the seasoning of the City's
economy with regard to its strength and direction in the face of a potential
national economic slowdown. As of July 10, 1995, S&P rated the City's general
obligation bonds BBB+ and Fitch rated such bonds A-; on February 28, 1996, Fitch
placed such bonds on FitchAlert with negative implications. Such ratings reflect
only the views of Moody's, S&P and Fitch, from which an explanation of the
significance of such ratings may be obtained. There is no assurance that such
ratings will continue for any given period of time or that they will not be
revised downward or withdrawn entirely. Any such downward revision or withdrawal
could have an adverse effect on the market prices of the City's bonds.
OTHER LOCALITIES. In 1992, the total indebtedness of all localities in the
State was approximately $35.2 billion, of which $19.5 billion was debt of the
City (excluding $5.9 billion in MAC debt); a small portion (approximately $71.6
million) of the $35.2 billion of indebtedness represented borrowing to finance
budgetary deficits and was issued pursuant to enabling State legislation. In
1992, an unusually large number of local government units requested
authorization for deficit financings. According to the Comptroller, ten local
government units were authorized to issue deficit financing in the aggregate
amount of $131.1 million, including Nassau County for $65 million in six-year
deficit bonds and Suffolk County for $36 million in six-year deficit bonds. The
current session of the Legislature may receive as many or more requests for
deficit-financing authorizations as a result of deficits previously incurred by
local governments. Although the Comptroller has indicated that the level of
deficit financing requests in 1992 was unprecedented, in 1993, five localities
were authorized to issue only $5.5 million in deficit financing indebtedness.
Such deficit financing by localities is not expected to have a material adverse
effect on the financial condition of the State.
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Fiscal difficulties experienced by the City of Yonkers resulted in the
creation of the Financial Control Board for the City of Yonkers ("Yonkers
Board") by the State in 1984. The Yonkers Board is charged with oversight of the
fiscal affairs of Yonkers. Future actions taken by the Governor or the State
Legislature to assist Yonkers could result in allocation of State resources in
amounts that cannot yet be determined.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the 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.
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GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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
B-26
<PAGE> 821
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 NRSRO. The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold. In the event of exercise of a call option
sold by the Fund with respect to securities not owned by the Fund, the Fund may
be required to acquire the underlying security at a disadvantageous price in
order to satisfy its obligation with respect to the call option.
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
B-27
<PAGE> 822
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) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
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
B-28
<PAGE> 823
amount from the party selling such cap to the extent that a specified index
exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will 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.
B-29
<PAGE> 824
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 the Code for qualification as a regulated investment company.
See "Tax Status" in the Prospectus.
B-30
<PAGE> 825
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 as having predominantly
B speculative characteristics with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
</TABLE>
B-31
<PAGE> 826
<TABLE>
<S> <C>
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 judgment with
respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and cash
flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
B-32
<PAGE> 827
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market-access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment:
-- Amortization schedule (the larger the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
Strong capacity to pay principal and interest. Issues determined to possess very
SP-1 strong characteristics are a plus (+) designation.
Satisfactory capacity to pay principal and interest, with some vulnerability to
SP-2 adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the
highest-quality obligations to 'D' for the lowest. These categories are as
follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment. They
are, however, more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
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 from
other sources it considers reliable. The ratings may be changed, suspended, or withdrawn as
a result of changes in or unavailability of, such information.
</TABLE>
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<PAGE> 828
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, INC.--A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection may
not be as large as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present which
suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e., they
are neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
</TABLE>
B-34
<PAGE> 829
<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.
B-35
<PAGE> 830
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-36
<PAGE> 831
<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-37
<PAGE> 832
<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-38
<PAGE> 833
<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-39
<PAGE> 834
<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-40
<PAGE> 835
<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-41
<PAGE> 836
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-42
<PAGE> 837
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 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.
B-43
<PAGE> 838
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>
Wellington T. Mara....................................... 35,461 A 8.76%
Giants Stadium
E. Rutherford, NJ 07073
PaineWebber for the Benefit of Ron J. Lambert............ 1,777 C 6.45%
240 Central Park South
Apt. 2H
New York, NY 10019-1413
Prudential Securities FBC................................ 1,795 C 6.52%
David T. Herr & Josiane R. Herr JT TEN
2176 Hobblebrush Lane
Lakeview, NY 14085-9603
Prudential Securities FBO................................ 2,118 C 7.69%
Mitchell Chernick
230 Locust Ave
Irvington, NY 10533-2315
Rena Port................................................ 2,138 C 7.76%
Abraham Port JT WROS
67-30 170 St.
Flushing, NY 11365-3308
Prudential Securities FBO................................ 2,190 C 7.95%
Linda A. Kahn
Kenneth Xahn JT WROS
80 Lancaster
Buffalo, NY 14222-1404
Smith Barney Inc. ....................................... 2,346 C 8.52%
00165335422
388 Greenwich Street
New York, NY 10013-2375
PaineWebber for the Benefit of Edwin E. Koral............ 3,146 C 11.42%
10655 East Gold Dust Ave.
Scottsdale, AZ 85258-6004
PaineWebber for the Benefit of Betty Ballin.............. 5,847 C 21.23%
Special Account
17 Michael F Street
Locust Valley, NY 11560-1223
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. 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, 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 &
B-44
<PAGE> 839
Rice, Inc., a New York based private investment firm. The General Partner of C&D
L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates
L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B.
Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J.
Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of Van Kampen American Capital own, in the aggregate,
not more than 7% of the common stock of VK/AC Holding, Inc. and have the right
to acquire, upon the exercise of options, approximately an additional 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 between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase. 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 agreement will continue in effect from year to year if specifically
approved by the Trustees of the Trust, of which the Fund is a separate series
(or by the Fund's shareholders), and by the disinterested trustees in compliance
with the requirements of the 1940 Act. The agreement may be terminated without
penalty upon 60 days' written notice by either party 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 and 1994, the Fund paid advisory
expenses of $0 and $0, 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 advised by
the adviser and distributed by the Distributor, share such costs proportionately
among themselves based upon their respective net asset values.
For the years ended December 31, 1995 and 1994, the Fund paid expenses of
approximately $0 and $0, respectively, representing the Distributor's cost of
providing certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
B-45
<PAGE> 840
The Fund shares together with the other Van Kampen American Capital mutual funds
distributed by the Distributor in the cost to provide such services, with 25% of
such costs shared proportionately based on the respective number of classes of
securities issued per fund and the remaining 75% of such cost based
proportionally on their respective net assets.
For the years ended December 31, 1995 and 1994, the Fund paid expenses of
approximately $0 and $0, respectively, representing the 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 and 1994, the Fund paid expenses of
approximately $0 and $0, 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. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and may select firms that are affiliated with the
Fund, the Adviser, or its distributor and other principal underwriters.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of the such services.
B-46
<PAGE> 841
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 to the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or 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 table below illustrates approximate equivalent taxable and tax-free yields
at the 1994 federal and New York State individual income tax rates in effect on
the date of this Statement of Additional Information, including the 36% and
39.6% rates enacted in August 1993 as part of the Revenue Reconciliation Act of
1993.
The table shows, for example, that a couple with a taxable income of $90,000,
or a single individual with a taxable income of $55,000, whose investments earn
a 6% tax-free yield, would have to earn approximately a 8.9% taxable yield at
current federal and state income tax rates to receive the same benefit.
1995 FEDERAL AND NEW YORK STATE TAXABLE VS. TAX-FREE YIELDS*
<TABLE>
<CAPTION>
TAXABLE EQUIVALENT ESTIMATED CURRENT RETURN
SINGLE JOINT TAX ---------------------------------------------------------------
RETURN RETURN BRACKET* 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0%
- --------------- --------------- -------- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-24,000 $ 0-40,100 21.1% 6.34% 6.97% 7.80% 8.24% 8.87% 9.51% 10.14%
24,000-58,150 40,100-96,900 33.1% 7.47 8.22 8.97 9.72 10.46 11.21 11.95
58,150-121,300 96,900-147,750 35.9% 7.80 8.58 9.36 10.14 10.92 11.70 12.48
121,300-263,750 147,750-263,750 40.6% 8.42 9.26 10.10 10.94 11.78 12.63 13.47
Over 263,750 Over 263,750 43.9% 8.91 9.80 10.70 11.59 12.48 13.37 14.28
</TABLE>
- ---------------
* The table assumes that federal taxable income is equal to state income subject
to tax, and in cases where more than one state rate falls within a federal
bracket, the highest state rate corresponding to the highest
B-47
<PAGE> 842
income within that federal bracket is used. Further, the table does not
reflect the New York State supplemental income tax based upon a taxpayer's New
York taxable income and New York State adjusted gross income. This
supplemental tax results in an increased marginal state income tax rate to the
extent a taxpayer's New York State adjusted gross income ranges between
$100,000 and $150,000.
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, 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 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 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."
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
B-48
<PAGE> 843
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 $0, $64,653, and $945 for the Class A Shares, Class B Shares, and Class
C Shares, respectively, of which $0 and $0 represent payments to financial
intermediaries under the Selling Agreements for Class A Shares and Class B
Shares, respectively. For the year ended December 31, 1995, the Fund has
reimbursed the Distributor $0 and $0 for advertising expenses and $0 and $0 for
compensation of the Distributor's sales personnel for Class A Shares and Class B
Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
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
seven 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 4.00% and 1.00%, respectively, of the lesser of the
then current net asset value of the shares redeemed or their initial purchase
price from the Fund. Yield quotations do not reflect the imposition of a
contingent deferred sales charge, and if any such contingent deferred sales
charge imposed at the time of redemption were reflected, it would reduce the
performance quoted.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends
B-49
<PAGE> 844
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 non-standardized 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,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.
CLASS A SHARES
The average total return, including the payment of the maximum sales charge,
with respect to the Class A Shares for (i) the one year period ended December
31, 1995 was 11.75% and (ii) the approximately one year, 5 month period from
July 29, 1994 (the commencement of investment operations of the Fund) through
December 31, 1995 was 5.93%.
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 5.03%. The tax-equivalent 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" and assuming a 40.9% tax rate) was 8.51%. 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 5.05%.
The Class A Shares cumulative non-standardized total return, including payment
of the maximum sales charge, with respect to the Class A Shares from its
inception to December 31, 1995 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 8.50%.
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
December 31, 1995 was 13.89%.
CLASS B SHARES
The average total return, including the payment of CDSC, with respect to the
Class B shares for (i) the one year period ended December 31, 1995 was 12.47%
and (ii) the approximately one year, 5 month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1995 was
6.27%.
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 4.52%. The tax-equivalent 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" and assuming a 40.9% tax rate) was 7.65%. 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 4.58%.
B-50
<PAGE> 845
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 8.99%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to December 31, 1995
was 12.74%.
CLASS C SHARES
The average total return, including the payment of CDSC, with respect to the
Class C shares for (i) the one year period ended December 31, 1995 was 15.39%
and (ii) the approximately one year, 5 month period from July 29, 1994 (the
commencement of investment operations of the Fund) through December 31, 1995 was
8.78%.
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 4.51%. The tax-equivalent 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" and assuming a 40.9% tax rate) was 7.63%. 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 4.59%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
(as calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 12.67%.
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to December 31, 1995
was 12.67%.
B-51
<PAGE> 846
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Board of Trustees and Shareholders of the
Van Kampen American Capital New York Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital New York Tax Free 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 and the statement of changes in net assets
and the financial highlights for the year then ended and for the period from
July 29, 1994 (Commencement of Investment Operations) to December 31, 1994.
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 New York Tax Free Income Fund as of
December 31, 1995, the results of its operations for the year then ended and
the changes in its net assets and the financial highlights for the year
then ended and for the period from July 29, 1994 (Commencement of Investment
Operations) to December 31, 1994, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 13, 1996
B-52
<PAGE> 847
<TABLE>
<CAPTION>
Portfolio of Investments
December 31, 1995
- -----------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds
New York 92.6%
$ 400 Battery Park City Auth NY Rev Sr Ser A Rfdg ............... 5.000% 11/01/13 $ 374,612
200 Broome Cnty, NY Ctfs Partn Pub Safety Fac (MBIA Insd) ..... 5.250 04/01/15 198,190
500 Buffalo, NY Swr Auth Rev Swr Sys Ser G Rfdg (FGIC Insd) ... 5.000 07/01/12 494,190
500 Essex Cnty, NY Indl Dev Agy Rev Solid Waste Disposal Intl
Paper Ser A ............................................... 5.800 12/01/19 501,680
400 New Rochelle, NY Ser B (MBIA Insd) ........................ 6.150 08/15/19 432,568
500 New York City Indl Dev Agy Rev Visy Paper Inc Proj <F2>.... 7.950 01/01/28 511,565
375 New York City Indl Dev Agy Spl Fac Rev Terminal One Group
Assn Proj ................................................. 5.700 01/01/04 378,596
500 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B
(AMBAC Insd) <F3> ......................................... 5.375 06/15/19 499,325
350 New York City Ser A Rfdg .................................. 6.250 08/01/08 359,940
500 New York City Ser C ....................................... 7.250 08/15/24 543,200
500 New York City Ser H (Cap Guar Insd) ....................... 7.000 02/01/21 567,755
300 New York St Dorm Auth Rev City Univ Ser F ................. 5.000 07/01/14 276,339
350 New York St Dorm Auth Rev City Univ Sys Cons Ser A......... 5.625 07/01/16 353,402
500 New York St Dorm Auth Rev Court Fac Lease Ser A ........... 5.700 05/15/22 496,255
300 New York St Dorm Auth Rev St Univ Edl Fac B Rfdg .......... 6.000 05/15/17 301,980
500 New York St Energy Resh & Dev Auth Elec Fac Rev Cons
Edison Co NY Inc Proj Ser A (MBIA Insd) ................... 7.500 01/01/26 557,340
300 New York St Energy Resh & Dev Auth St Svc Contract Rev
Western NY Nuclear Svc Cent Proj .......................... 6.000 04/01/00 313,449
500 New York St Environmental Fac Corp Pollutn Ctl Rev St Wtr
Revolving Fund Ser D ...................................... 6.850 11/15/11 567,825
500 New York St Hsg Fin Agy Rev Insd Multi-Family Mtg Ser B
(AMBAC Insd) .............................................. 6.250 08/15/14 522,870
425 New York St Loc Govt Assistance Corp Ser B ................ 6.000 04/01/12 445,655
595 New York St Med Care Fac Fin Agy Rev North Shore Univ Glen
Cove Ser A (MBIA Insd) .................................... 5.125 11/01/12 590,978
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(AMBAC Insd) .............................................. 6.200 08/15/05 556,490
500 New York St Med Care Fac Fin Agy Rev NY Hosp Mtg Ser A
(AMBAC Insd) .............................................. 6.600 02/15/11 566,165
300 New York St Med Care Fac Fin Agy Rev Presbyterian Hosp Mtg
Ser A Rfdg (FHA Gtd) ...................................... 5.250 08/15/14 294,564
500 New York St Mtg Agy Rev Homeowner Mtg Ser 30B ............. 6.650 10/01/25 521,185
300 New York St Thruway Auth Hwy & Brdg Tr Fund Ser A ......... 6.000 04/01/14 316,299
500 New York St Urban Dev Corp Rev Correctional Cap Fac Ser 5
(MBIA Insd) ............................................... 5.500 01/01/25 502,250
</TABLE>
See Notes to Financial Statements
B-53
<PAGE> 848
<TABLE>
<CAPTION>
Portfolio of Investments (Continued)
December 31, 1995
- ----------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
New York (Continued)
$ 370 New York St Urban Dev Corp Rev Correctional
Fac Rfdg .................................... 5.625% 01/01/07 $ 374,033
300 New York St Urban Dev Corp Rev Correctional
Fac Rfdg .................................... 5.750 01/01/13 300,939
250 Newark Wayne Cmnty Hosp Inc NY Hosp Rev Hosp
Rev Ser A ................................... 7.600 09/01/15 261,270
420 Niagara Falls, NY Pub Impt (MBIA Insd) ...... 6.900 03/01/20 481,475
500 Oneida Cnty, NY Pub Impt <F3> ............... 5.850 03/15/12 508,350
400 Triborough Brdg & Tunl Auth NY Rev Genl Purp
Ser A Rfdg .................................. 5.000 01/01/12 390,740
------------
14,361,474
------------
Guam 3.3%
500 Guam Govt Ser A ............................. 5.500 09/01/01 506,025
------------
Puerto Rico 2.0%
300 Puerto Rico Comwlth Ser A Rfdg .............. 6.250 07/01/10 318,966
------------
Total Long-Term Investments 97.9%
(Cost $14,033,522) <F1>................................................ 15,186,465
Short-Term Investments at Amortized Cost 2.6%......................... 400,000
Liabilities in Excess of Other Assets (0.5%).......................... (72,851)
------------
Net Assets 100%....................................................... $ 15,513,614
=============
<FN>
<F1> At December 31, 1995, cost for federal income tax purposes is $14,033,522;
the aggregate gross unrealized appreciation is $1,152,943 and the
aggregate gross unrealized depreciation is $-0-, resulting in net
unrealized appreciation of $1,152,943.
<F2> Securities purchased on a when issued or delayed delivery basis.
<F3> Assets segregated as collateral for when issued or delayed delivery
purchase commitments.
</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.
<TABLE>
<CAPTION>
Portfolio Composition by Credit Quality
<S> <C>
AAA........... 45.0%
AA............ 5.9
A............. 15.5
BBB........... 28.5
Non-Rated..... 5.1
=======
100%
=======
</TABLE>
See Notes to Financial Statements
B-54
<PAGE> 849
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at Market Value (Cost $14,033,522) (Note 1)......................... $ 15,186,465
Short-Term Investments (Note 1).................................................. 400,000
Cash............................................................................. 141,539
Receivables:
Interest....................................................................... 308,367
Investments Sold............................................................... 285,015
Fund Shares Sold............................................................... 10,237
Unamortized Organizational Expenses (Note 1)..................................... 85,760
--------------
Total Assets..................................................................... 16,417,383
--------------
Liabilities:
Payables:
Investments Purchased.......................................................... 783,435
Income Distributions .......................................................... 30,040
Fund Shares Repurchased........................................................ 28,174
Accrued Expenses................................................................. 62,120
--------------
Total Liabilities............................................................ 903,769
--------------
Net Assets....................................................................... $ 15,513,614
==============
Net Assets Consist of:
Capital (Note 3)................................................................. $ 14,677,155
Net Unrealized Appreciation on Investments....................................... 1,152,943
Accumulated Distributions in Excess of Net Investment Income .................... (7,788)
Accumulated Net Realized Loss on Investments..................................... (308,696)
--------------
Net Assets....................................................................... $ 15,513,614
==============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$5,354,675 and 355,842 shares of capital stock issued and outstanding) (Note 3).. $ 15.05
Maximum sales charge (4.75%* of offering price).................................. .75
--------------
Maximum offering price to public................................................. $ 15.80
==============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$9,747,319 and 647,820 shares of capital stock issued and outstanding) (Note 3).. $ 15.05
==============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $411,620
and 27,366 shares of capital stock issued and outstanding) (Note 3).............. $ 15.04
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
B-55
<PAGE> 850
<TABLE>
<CAPTION>
Statement of Operations
For the Year Ended December 31, 1995
- ----------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Interest......................................................................... $ 788,239
--------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$10,877, $92,362 and $2,634, respectively) (Note 6) ............................. 105,873
Investment Advisory Fee (Note 2)................................................. 81,041
Printing......................................................................... 42,680
Custodian........................................................................ 35,125
Amortization of Organizational Expenses (Note 1)................................. 23,988
Shareholder Services (Note 2).................................................... 17,870
Trustees Fees and Expenses (Note 2).............................................. 10,249
Legal (Note 2)................................................................... 9,125
Other............................................................................ 25,665
--------------
Total Expenses................................................................... 351,616
Less Fees Waived and Expenses Reimbursed ($81,041 and $173,563, respectively).... 254,604
--------------
Net Expenses..................................................................... 97,012
--------------
Net Investment Income............................................................ $ 691,227
==============
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................. $ 6,484,208
Cost of Securities Sold.......................................................... (6,634,617)
--------------
Net Realized Loss on Investments (Including realized loss on futures
transactions of $271,427) ....................................................... (150,409)
--------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................... (340,486)
End of the Period................................................................ 1,152,943
--------------
Net Unrealized Appreciation on Investments During the Period..................... 1,493,429
--------------
Net Realized and Unrealized Gain on Investments.................................. $ 1,343,020
==============
Net Increase in Net Assets from Operations....................................... $ 2,034,247
==============
</TABLE>
See Notes to Financial Statements
B-56
<PAGE> 851
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
For the Year Ended December 31, 1995
and the Period July 29, 1994 (Commencement of Investment Operations) to December 31, 1994
- ------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income..................................... $ 691,227 $ 190,207
Net Realized Loss on Investments.......................... (150,409) (158,287)
Net Unrealized Appreciation/Depreciation on Investments
During the Period......................................... 1,493,429 (340,486)
----------------- -----------------
Change in Net Assets from Operations ..................... 2,034,247 (308,566)
----------------- -----------------
Distributions from Net Investment Income.................. (691,442) (189,992)
Distributions in Excess of Net Investment Income.......... (7,788) -0-
----------------- -----------------
Distributions from and in Excess of Net Investment
Income* (Note 1) ......................................... (699,230) (189,992)
----------------- -----------------
Net Change in Net Assets from Investment Activities....... 1,335,017 (498,558)
----------------- -----------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold................................. 4,830,393 12,235,618
Net Asset Value of Shares Issued Through Dividend
Reinvestment.............................................. 353,229 91,720
Cost of Shares Repurchased................................ (2,209,451) (628,644)
----------------- -----------------
Net Change in Net Assets from Capital Transactions........ 2,974,171 11,698,694
----------------- -----------------
Total Increase in Net Assets.............................. 4,309,188 11,200,136
Net Assets:
Beginning of the Period................................... 11,204,426 4,290
----------------- ----------------
End of the Period (Including undistributed net investment
income of $(7,788) and $215, respectively) .............. $ 15,513,614 $ 11,204,426
----------------- ================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period 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..................... $ (226,467) $ (50,186)
Class B Shares..................... (459,895) (136,720)
Class C Shares..................... (12,868) (3,086)
----------------- -----------------
$ (699,230) $ (189,992)
================= =================
</TABLE>
See Notes to Financial Statements
B-57
<PAGE> 852
<TABLE>
<CAPTION>
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ----------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class A Shares 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.............................. $ 13.579 $ 14.300
---------- -------------
Net Investment Income.............................................. .821 .302
Net Realized and Unrealized Gain/Loss on Investments............... 1.476 (.722)
---------- -------------
Total from Investment Operations...................................... 2.297 (.420)
Less Distributions from and in Excess of Net Investment Income (Note
1).................................................................... .828 .301
---------- -------------
Net Asset Value, End of the Period.................................... $ 15.048 $ 13.579
========== =============
Total Return*......................................................... 17.33% (2.93%)**
Net Assets at End of the Period (In millions)......................... $ 5.4 $ 2.9
Ratio of Expenses to Average Net Assets* (Annualized)................. .21% .26%
Ratio of Net Investment Income to Average Net Assets* (Annualized).... 5.63% 5.27%
Portfolio Turnover.................................................... 51.00% 68.11%
*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 (Annualized).................. 2.10% 2.73%
Ratio of Net Investment Income to Average Net Assets (Annualized)..... 3.74% 2.81%
**Non-Annualized
</TABLE>
See Notes to Financial Statements
B-58
<PAGE> 853
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- ------------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class B Shares 1995 December 31, 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.............................. $ 13.578 $ 14.300
---------- -------------
Net Investment Income.............................................. .713 .263
Net Realized and Unrealized Gain/Loss on Investments............... 1.476 (.722)
---------- -------------
Total from Investment Operations...................................... 2.189 (.459)
Less Distributions from and in Excess of Net Investment Income (Note
1).................................................................... .721 .263
---------- -------------
Net Asset Value, End of the Period.................................... $ 15.046 $ 13.578
========== =============
Total Return*......................................................... 16.47% (3.20%)**
Net Assets at End of the Period (In millions)......................... $ 9.7 $ 8.1
Ratio of Expenses to Average Net Assets* (Annualized)................. .93% .96%
Ratio of Net Investment Income to Average Net Assets* (Annualized).... 4.93% 4.58%
Portfolio Turnover.................................................... 51.00% 68.11%
*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 (Annualized).................. 2.82% 3.42%
Ratio of Net Investment Income to Average Net Assets (Annualized)..... 3.04% 2.12%
**Non-Annualized
</TABLE>
See Notes to Financial Statements
B-59
<PAGE> 854
<TABLE>
<CAPTION>
Financial Highlights (Continued)
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------------------------------
July 29, 1994
Year (Commencement
Ended of Investment
December 31, Operations) to
Class C Shares 1995 December 31, 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.............................. $ 13.579 $ 14.300
---------- -------------
Net Investment Income.............................................. .711 .267
Net Realized and Unrealized Gain/Loss on Investments............... 1.472 (.725)
---------- -------------
Total from Investment Operations...................................... 2.183 (.458)
Less Distributions from and in Excess of Net Investment Income (Note
1).................................................................... .721 .263
---------- -------------
Net Asset Value, End of the Period.................................... $ 15.041 $ 13.579
========== ==============
Total Return*......................................................... 16.39% (3.20%)**
Net Assets at End of the Period (In millions)......................... $ .4 $ .2
Ratio of Expenses to Average Net Assets* (Annualized)................. .98% .96%
Ratio of Net Investment Income to Average Net Assets* (Annualized).... 4.81% 4.58%
Portfolio Turnover.................................................... 51.00% 68.11%
*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 (Annualized).................. 2.86% 3.42%
Ratio of Net Investment Income to Average Net Assets (Annualized)..... 2.93% 2.12%
**Non-Annualized
</TABLE>
See Notes to Financial Statements
B-60
<PAGE> 855
Notes to Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen American Capital New York Tax Free 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 non-diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund's investment objective is to provide investors with a high
level of current income exempt from federal, New York State and New York City
income taxes, consistent with preservation of capital. The Fund commenced
investment operations on July 29, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" 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 on securities
purchased 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.
B-61
<PAGE> 856
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
D. Organizational Expenses-The Fund will reimburse 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 $120,000. These costs
are being amortized on a straight line basis over the 60 month period ending
July 28, 1999. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by VKAC are redeemed by the Fund during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income, if any, to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1995, the Fund had an accumulated capital loss
carryforward for tax purposes of $214,449, of which $116,418 and $98,031 will
expire on December 31, 2002 and 2003, respectively. Net realized gains or
losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.
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. Due to inherent differences in the recognition of certain
expenses under generally accepted accounting principles and federal income tax
purposes, 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.
B-62
<PAGE> 857
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
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.... .600 of 1%
Over $500 million..... .500 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 $12,400 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' (collectively "VKAC") cost of providing accounting,
cash management, legal services and certain shareholder services (prior to
July, 1995) to the Fund. All of this cost has been waived by VKAC.
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 period
ended December 31, 1995, the Fund recognized expenses of approximately
$3,400, representing ACCESS' cost of providing transfer agency and
shareholder services plus a profit. All of this expense has been assumed
by VKAC.
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 $8,000.
At December 31, 1995, VKAC owned 100 shares each of Classes A, B and C.
B-63
<PAGE> 858
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 $5,076,981, $9,203,670 and $396,504
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......................... 178,498 $ 2,590,867
Class B......................... 139,452 2,015,988
Class C......................... 15,339 223,538
---------- ---------------
Total Sales..................... 333,289 $ 4,830,393
========= ===============
Dividend Reinvestment:
Class A......................... 9,002 $ 130,867
Class B......................... 14,956 216,684
Class C......................... 389 5,678
---------- ---------------
Total Dividend Reinvestment..... 24,347 $ 353,229
========== ===============
Repurchases:
Class A......................... (46,443) $ (668,258)
Class B......................... (104,963) (1,535,985)
Class C......................... (352) (5,208)
---------- ---------------
Total Repurchases............... (151,758) $ (2,209,451)
========== ================
</TABLE>
B-64
<PAGE> 859
Notes to Financial Statements (Continued)
December 31, 1995
- --------------------------------------------------------------------------------
At December 31, 1994, capital aggregated $3,023,505, $8,506,983 and $172,496
for Classes A, B and C, respectively. For the period ended December 31, 1994,
transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A......................... 248,445 $ 3,473,866
Class B......................... 604,458 8,591,335
Class C......................... 11,843 170,417
------- -------------
Total Sales..................... 864,746 $ 12,235,618
======= =============
Dividend Reinvestment:
Class A......................... 1,907 $ 25,968
Class B......................... 4,774 65,103
Class C......................... 47 649
------- -------------
Total Dividend Reinvestment..... 6,728 $ 91,720
======= =============
Repurchases:
Class A......................... (35,667) $ (477,759)
Class B......................... (10,957) (150,885)
Class C......................... -0- -0-
------- -------------
Total Repurchases............... (46,624) $ (628,644)
======= =============
</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.... .00% None
</TABLE>
B-65
<PAGE> 860
Notes to Financial Statements (Continued)
December 31, 1995
- ----------------------------------------------------------------------------
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
$8,700 and CDSC on the redeemed shares of Classes B and C of approximately
$33,400. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1995, were $9,855,773 and
$6,634,617, 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 utilizes futures contracts to manage the portfolio's
effective maturity or duration.
A futures contract is an agreement involving the delivery of a particular
asset on a specified future date at an agreed upon price. The Fund generally
invests in futures on U.S. Treasury Bonds and the Municipal Bond Index and
typically closes the contract prior to the delivery date.
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Contracts
- ------------------------------------------------
<S> <C>
Outstanding at December 31, 1994..... -0-
Futures Opened....................... 40
Futures Closed....................... (40)
---------
Outstanding at December 31, 1995..... -0-
==========
</TABLE>
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% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1995, are payments to VKAC of approximately $64,700.
B-66
<PAGE> 861
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
List all financial statements and exhibits as part of the Registration
Statement.
(A) FINANCIAL STATEMENTS:
For each of the following Funds:
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 Municipal Income 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;
Included in Part A of such Registration Statement:
Financial Highlights
Included in Part B of such Registration Statement:
Independent Auditors' Report
Financial Statements
Notes to Financial Statements
For each of Van Kampen American Capital California Tax Free Income Fund,
Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax
Free Income Fund are not included herein because each is a new registrant.
(B) EXHIBITS:
<TABLE>
<C> <S> <C> <C>
(1) (a) Agreement and Declaration of Trust+
(b) Certificate of Designation for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(2) By-Laws+
(4) Specimen Certificate of Share of Beneficial Interest of:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
</TABLE>
C-1
<PAGE> 862
<TABLE>
<S> <C> <C> <C>
(ix) Van Kampen American Capital California Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(5) Investment Advisory Agreement for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(6) (a) Distribution and Service Agreement for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(b) Form of Dealer Agreement(37)
(c) Form of Broker Agreement(37)
(d) Form of Bank Agreement(37)
(8) (a) Form of Custodian Agreement for:
(i) Van Kampen American Capital Insured Tax Free Income Fund(6)
(ii) Van Kampen American Capital Tax Free High Income Fund(6)
(iii) Van Kampen American Capital California Insured Tax Free Fund(2)
(iv) Van Kampen American Capital Municipal Income Fund(10) and (6)
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund(19)
and (6)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(23) and
(6)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(29) and (6)
</TABLE>
C-2
<PAGE> 863
<TABLE>
<S> <C> <C> <C>
(viii) Van Kampen American Capital New York Tax Free Income Fund(29) and (6)
(ix) Van Kampen American Capital California Tax Free Income Fund(31) and (6)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31) and (6)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31) and (6)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31) and (6)
(b) Transfer Agency and Service Agreement+
(9) (a) Amended and Restated Fund Accounting Agreement+
(b) Amended and Restated Legal Services Agreement+
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom for:
(i) Van Kampen American Capital Insured Tax Free Income Fund(37)
(ii) Van Kampen American Capital Tax Free High Income Fund(38)
(iii) Van Kampen American Capital California Insured Tax Free Fund(37)
(iv) Van Kampen American Capital Municipal Income Fund(37)
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund(38)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(38)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(38)
(viii) Van Kampen American Capital New York Tax Free Income Fund(38)
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(11) Consents of KPMG Peat Marwick LLP for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(13) Letter of understanding relating to initial capital(1)
(15) (a) Plan of Distribution Pursuant to Rule 12b-1 for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(b) Form of Shareholder Assistance Agreement(37)
(c) Form of Administrative Services Agreement(37)
</TABLE>
C-3
<PAGE> 864
<TABLE>
<S> <C> <C> <C>
(d) Service Plan for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(16) (a) Computation of Performance Quotations for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund+
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund+
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund+
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund+
(viii) Van Kampen American Capital New York Tax Free Income Fund+
(17) (a) List of certain investment companies in response to Item 29(a)+
(b) List of officers and directors of Van Kampen American Capital Distributors, Inc.
in response to Item 29(b)+
(24) Power of Attorney(38)
(27) Financial Data Schedules+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(2) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 9, 1986.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
(10) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(19) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
February 12, 1993.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
March 1, 1993.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
April 30, 1993.
(26) Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed December 30, 1993.
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on February 25, 1994.
(29) Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 5, 1994.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 24, 1995.
C-4
<PAGE> 865
(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 N-1A, File Number 2-99715,
filed on August 18, 1995.
+ Filed herewith.
++ To be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of February 26, 1996:
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
<C> <S> <C>
Shares of Beneficial Interest, without par value:
(i) Van Kampen American Capital Insured Tax Free Income Fund
48,713
Class A Shares....................................................
1,831
Class B Shares....................................................
126
Class C Shares....................................................
(ii) Van Kampen American Capital Tax Free High Income Fund
21,916
Class A Shares....................................................
3,877
Class B Shares....................................................
245
Class C Shares....................................................
(iii) Van Kampen American Capital California Insured Tax Free Fund
3,631
Class A Shares....................................................
698
Class B Shares....................................................
46
Class C Shares....................................................
(iv) Van Kampen American Capital Municipal Income Fund
24,892
Class A Shares....................................................
6,699
Class B Shares....................................................
516
Class C Shares....................................................
(v) Van Kampen American Capital Intermediate Term Municipal Income
Fund
578
Class A Shares....................................................
498
Class B Shares....................................................
49
Class C Shares....................................................
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
437
Class A Shares....................................................
366
Class B Shares....................................................
26
Class C Shares....................................................
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
246
Class A Shares....................................................
271
Class B Shares....................................................
23
Class C Shares....................................................
(viii) Van Kampen American Capital New York Tax Free Income Fund
251
Class A Shares....................................................
310
Class B Shares....................................................
21
Class C Shares....................................................
(ix) Van Kampen American Capital California Tax Free Income Fund
0
Class A Shares....................................................
0
Class B Shares....................................................
0
Class C Shares....................................................
(x) Van Kampen American Capital Michigan Tax Free Income Fund
0
Class A Shares....................................................
0
Class B Shares....................................................
0
Class C Shares....................................................
</TABLE>
C-5
<PAGE> 866
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
<C> <S> <C>
(xi) Van Kampen American Capital Missouri Tax Free Income Fund
0
Class A Shares....................................................
0
Class B Shares....................................................
0
Class C Shares....................................................
(xii) Van Kampen American Capital Ohio Tax Free Income Fund
0
Class A Shares....................................................
0
Class B Shares....................................................
0
Class C Shares....................................................
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Investment
Advisory and Other Services" and "Trustees and Officers" in the Statement of
Additional Information for information regarding the business
C-6
<PAGE> 867
of the Adviser. For information as to the business, profession, vocation and
employment of a substantial nature of directors and officers of the Adviser
reference is made to the Adviser's current Form ADV (File No. 801-18161) filed
under the Investment Advisers Act of 1940, as amended, incorporated herein by
reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.
(b) Van Kampen American Capital Distributors, Inc., which is an affiliated
person of an affiliated person of Registrant, is the sole principal underwriter
for Registrant. The name, principal business address and positions and offices
with Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading "Trustees and Officers" in Part B of this Registration Statement, none
of such persons has any position or office with Registrant.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Registrant, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, ACCESS Investors Services,
Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri 64153, or at State
Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, Massachusetts
02171. All such accounts, books and other documents required to be maintained by
the principal underwriter will be maintained at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment to the
Registration Statement to add financial statements, which need not be certified,
within four to six months from the effective date of this Registration Statement
for each of the Van Kampen American Capital California Tax Free Income Fund, Van
Kampen American Capital Michigan Tax Free Income, Van Kampen American Capital
Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax Free
Income Fund.
(c) The Registrant provides the information required by Item 5A in the
respective annual reports to shareholders of Registrant's series and hereby
undertakes to furnish without charge to each person to whom a prospectus is
delivered for a particular series with a copy of the latest annual report to
shareholders of such series.
C-7
<PAGE> 868
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL TAX
FREE INCOME TRUST, certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Oakbrook Terrace and the State of Illinois, on the
19th day of April, 1996.
VAN KAMPEN AMERICAN CAPITAL
TAX FREE INCOME TRUST
By: /s/ RONALD A. NYBERG
---------------------------------------
Ronald A. Nyberg, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed on April 19, 1996 by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES 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
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 April 19, 1996
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-8
<PAGE> 869
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 39 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON FEBRUARY 29, 1996
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
----- -------------------------------------------------------------------
<C> <S> <C> <C>
(1) (a) Agreement and Declaration of Trust
(b) Certificate of Designation for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(2) By-Laws
(4) Specimen Certificate of Share of Beneficial Interest of:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(5) Investment Advisory Agreement for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(6) (a) Distribution and Service Agreement for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(8) (b) Transfer Agency and Service Agreement
(9) (a) Amended and Restated Fund Accounting Agreement
(b) Amended and Restated Legal Services Agreement
(11) Consents of KPMG Peat Marwick LLP for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
</TABLE>
<PAGE> 870
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
----- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(15) (a) Plan of Distribution Pursuant to Rule 12b-1 for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(d) Service Plan for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(16) (a) Computation of Performance Quotations for:
(i) Van Kampen American Capital Insured Tax Free Income Fund
(ii) Van Kampen American Capital Tax Free High Income Fund
(iii) Van Kampen American Capital California Insured Tax Free Fund
(iv) Van Kampen American Capital Municipal Income Fund
(v) Van Kampen American Capital Intermediate Term Municipal Income Fund
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
(viii) Van Kampen American Capital New York Tax Free Income Fund
(17) (a) List of certain investment companies in response to Item 29(a)
(b) List of officers and directors of Van Kampen American Capital Distributors,
Inc.
in response to Item 29(b)
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT (1)(a)
AGREEMENT AND DECLARATION OF TRUST
OF
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
May 10, 1995
<PAGE> 2
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
AGREEMENT AND DECLARATION OF TRUST
Index
<TABLE>
<S> <C>
RECITALS ................................................................ 1
ARTICLE I THE TRUST .................................................. 2
SECTION 1.1 Name ....................................................... 2
SECTION 1.2. Location ................................................... 2
SECTION 1.3. Nature of Trust ............................................ 2
SECTION 1.4. Definitions ................................................ 2
SECTION 1.5. Real Property to be Converted into Personal Property ....... 5
ARTICLE 2 PURPOSE OF THE TRUST ....................................... 5
ARTICLE 3 POWERS OF THE TRUSTEES ..................................... 6
SECTION 3.1. Powers in General .......................................... 6
(a) Investments ........................................................ 6
(b) Disposition of Assets .............................................. 7
(c) Ownership Powers ................................................... 7
(d) Form of Holding .................................................... 7
(e) Reorganization, etc. ............................................... 7
(f) Voting Trusts, etc. ................................................ 7
(g) Contracts, etc. .................................................... 7
(h) Guarantees, etc. ................................................... 7
(i) Partnerships, etc. ................................................. 8
(j) Insurance .......................................................... 8
(k) Pensions, etc ...................................................... 8
(l) Power of Collection and Litigation ................................. 8
(m) Issuance and Repurchase of Shares .................................. 8
(n) Offices ............................................................ 8
(o) Expenses ........................................................... 8
(p) Agents, etc. ....................................................... 9
(q) Accounts . ......................................................... 9
(r) Valuation .......................................................... 9
(s) Indemnification .................................................... 9
(t) General ............................................................ 9
SECTION 3.2. Borrowings; Financings; Issuance of Securities .............. 9
</TABLE>
i
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<TABLE>
<S> <C>
SECTION 3.3. Deposits .................................................. 9
SECTION 3.4. Allocations ............................................... 10
SECTION 3.5. Further Powers; Limitations ............................... 10
ARTICLE 4 TRUSTEES AND OFFICERS ..................................... 10
SECTION 4.1. Number, Designation, Election, Term, etc .................. 10
(a) Initial Trustee ............................................................ 10
(b) Number ..................................................................... 10
(c) Election and Term .......................................................... 11
(d) Resignation and Retirement ................................................. 11
(e) Removal .................................................................... 11
(f) Vacancies .................................................................. 11
(g) Acceptance of Trusts ....................................................... 11
(h) Effect of Death, Resignation, etc. ......................................... 12
(i) Conveyance ................................................................. 12
(j) No Accounting .............................................................. 12
SECTION 4.2. Trustees' Meetings; Participation by Telephone, etc. ...... 12
SECTION 4.3. Committees; Delegation .................................... 12
SECTION 4.4. Officers .................................................. 13
SECTION 4.5. Compensation of Trustees and Officers ..................... 13
SECTION 4.6. Ownership of Shares and Securities of the Trust ........... 13
SECTION 4.7. Right of Trustees and Officers to Own Property or to Engage
in Business; Authority of Trustees to Permit Others to Do
Likewise .................................................. 13
SECTION 4.8. Reliance on Experts ....................................... 13
SECTION 4.9. Surety Bonds .............................................. 14
SECTION 4.10. Apparent Authority of Trustees and Officers ............... 14
SECTION 4.11. Other Relationships Not Prohibited ........................ 14
SECTION 4.12. Payment of Trust Expenses ................................. 14
SECTION 4.13. 0wnership of the Trust Property ........................... 15
</TABLE>
ii
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<TABLE>
<S> <C>
SECTION 4.14. By-Laws ............................................... 15
ARTICLE 5 DELEGATION OF MANAGERIAL RESPONSIBILITIES ............. 15
SECTION 5.1. Appointment; Action by Less than All Trustees ......... 15
SECTION 5.2. Certain Contracts ..................................... 15
(a) Advisory ........................................................ 16
(b) Administration .................................................. 16
(c) Underwriting .................................................... 16
(d) Custodian ....................................................... 16
(e) Transfer and Dividend Disbursing Agent .......................... 17
(f) Shareholder Servicing ........................................... 17
(g) Accounting ...................................................... 17
Section 5.3. Distribution Arrangements ............................. 17
Section 5.4. Service Arrangements .................................. 17
ARTICLE 6 SERIES AND SHARES ..................................... 17
SECTION 6.1. Description of Series and Shares ...................... 17
(a) General ......................................................... 17
(b) Establishment, etc. of Series; Authorization of Shares .......... 18
(c) Character of Separate Series and Shares Thereof ................. 18
(d) Consideration for Shares ........................................ 18
(e) Assets Belonging to Series ...................................... 19
(f) Liabilities of Series ........................................... 19
(g) Dividends ....................................................... 19
(h) Liquidation ..................................................... 20
(i) Voting .......................................................... 20
(j) Redemption by Shareholder ....................................... 20
(k) Redemption at the Option of the Trust ........................... 21
(l) Net Asset Value ................................................. 21
(m) Transfer ........................................................ 21
(n) Equality ........................................................ 21
(o) Rights of Fractional Shares ..................................... 22
(p) Conversion Rights ............................................... 22
SECTION 6.2. Ownership of Shares ................................... 22
SECTION 6.3. Investments in the Trust .............................. 23
SECTION 6.4. No Pre-emptive Rights ................................. 23
</TABLE>
iii
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<TABLE>
<S> <C>
SECTION 6.5. Status of Shares ............................................... 23
ARTICLE 7 SHAREHOLDERS' VOTING POWERS AND MEETINGS ....................... 23
SECTION 7.1. Voting Powers .................................................. 23
SECTION 7.2. Number of Votes and Manner of Voting; Proxies .................. 24
SECTION 7.3. Meetings ....................................................... 24
SECTION 7.4. Record Dates ................................................... 24
SECTION 7.5. Quorum and Required Vote ....................................... 25
SECTION 7.6. Action by Written Consent ...................................... 25
SECTION 7.7. Inspection of Records .......................................... 25
SECTION 7.8. Additional Provisions .......................................... 25
ARTICLE 8 LIMITATION OF LIABILITY; INDEMNIFICATION ....................... 25
SECTION 8.1. Trustees, Shareholders, etc. Not Personally Liable; Notice ..... 25
SECTION 8.2. Trustees' Good Faith Action; Expert Advice; No Bond or Surety .. 26
SECTION 8.3. Indemnification of Shareholders ................................ 26
SECTION 8.4. Indemnification of Trustees, Officers, etc. .................... 27
SECTION 8.5. Compromise Payment ............................................. 27
SECTION 8.6. Indemnification Not Exclusive, etc. ............................ 28
SECTION 8.7. Liability of Third Persons Dealing with Trustees ............... 28
ARTICLE 9 DURATION; REORGANIZATION; INCORPORATION;
AMENDMENTS ..................................................... 28
SECTION 9.1. Duration of Trust .............................................. 28
SECTION 9.2. Termination of Trust ........................................... 28
SECTION 9.3. Reorganization ................................................. 29
SECTION 9.4. Incorporation .................................................. 29
</TABLE>
iv
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<TABLE>
<S> <C>
SECTION 9.5. Amendments; etc. ............................................. 29
SECTION 9.6. Filing of Copies of Declaration and Amendments ............... 30
ARTICLE 10 MISCELLANEOUS ................................................ 30
SECTION 10.1. Notices ...................................................... 30
SECTION 10.2. Governing Law ................................................ 30
SECTION 10.3. Counterparts ................................................. 30
SECTION 10.4. Reliance by Third Parties .................................... 30
SECTION 10.5. References; Headings ......................................... 31
SECTION 10.6. Provisions in Conflict With Law or Regulation ................ 31
SECTION 10.7. Use of the Name "Van Kampen American Capital" ................ 31
Signature .................................................................. 32
Acknowledgments ............................................................ 33
</TABLE>
v
<PAGE> 7
AGREEMENT AND DECLARATION OF TRUST
OF
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
This AGREEMENT AND DECLARATION OF TRUST, made at this 10th day of May,
1995, by and between Ronald A. Nyberg, an individual residing in Naperville,
Illinois (the "Settlor"), and the Trustee whose signature is set forth below
(the "Initial Trustee").
W I T N E S S E T H T H A T:
WHEREAS, the Settlor proposes to deliver to the Initial Trustee the sum of
one hundred dollars ($100.00) lawful money of the United States of America in
trust hereunder and to authorize the Initial Trustee and all other individuals
acting as Trustees hereunder to employ such funds, and any other funds coming
into their hands or the hands of their successor or successors as such
Trustees, to carry on the business of an investment company and as such of
buying, selling, investing or otherwise dealing in and with stocks, bonds,
debentures, warrants and other securities and interests therein, financial
futures contracts, or options with respect to securities or financial futures
contracts, and such other and further investment media and other property as
the Trustees may deem advisable, which are not prohibited by law or the terms
of this Declaration; and
WHEREAS, the Initial Trustee is willing to accept such sum, together with
any and all additions thereto and the income or increments thereof, upon the
terms, conditions and trusts hereinafter set forth; and
WHEREAS, the beneficial interest in the assets held by the Trustees shall
be divided into transferable Shares, all in accordance with the provisions
hereinafter set forth; and
WHEREAS, it is desired that the trust established hereby be managed and
operated as a trust with transferable shares under the laws of Delaware with
respect to Delaware business trusts in accordance with the provisions
hereinafter set forth;
NOW, THEREFORE, the Initial Trustee, for himself and his successors as
Trustees, hereby declares and agrees with the Settlor, for himself and for all
Persons who shall hereafter become holders of Shares that the Trustees will
hold the sum delivered to them upon the execution hereof, and all other and
further cash, securities and other property of every type and description which
they may in any way acquire in their capacity as such Trustees, together with
the income therefrom and the proceeds thereof, IN TRUST NEVERTHELESS, to manage
and dispose of the same for the benefit of the holders from time to time of the
Shares being issued and to be issued hereunder and in the manner and subject to
the provisions hereof, to wit:
1
<PAGE> 8
ARTICLE I
THE TRUST
SECTION 1.1 Name. The name of the Trust shall be
"VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST"
and so far as may be practicable, the Trustees shall conduct the Trust's
activities, execute all documents and sue or be sued under that name, which
name (and the word "Trust" wherever used in this Agreement and Declaration of
Trust, except where the context otherwise requires) shall refer to the Trustees
in their capacity as Trustees, and not individually or personally, and shall
not refer to the officers, agents or employees of the Trust or of such
Trustees, or to the holders of the Shares of Beneficial Interest of the Trust
or any Series. If the Trustees determine that the use of such name is not
practicable, legal or convenient at any time or in any jurisdiction, or if the
Trust is required to discontinue the use of such name pursuant to Section 10.7
hereof, then subject to that Section, the Trustees may use such other
designation, or they may adopt such other name for the Trust as they deem
proper, and the Trust may hold property and conduct its activities under such
designation or name.
SECTION 1.2. Location. The Trust shall maintain a registered office in the
State of Delaware and may have such other offices or places of business as the
Trustees may from time to time determine to be necessary or expedient.
SECTION 1.3. Nature of Trust. The Trust shall be a trust with transferable
shares under the laws of The State of Delaware, of the type defined in Title
12, Chapter 38, Section 3801 of the Delaware Code as a business trust. The
Trust is not intended to be, shall not be deemed to be, and shall not be
treated as, a general partnership, limited partnership, joint venture,
corporation or joint stock company. The Shareholders shall be beneficiaries and
their relationship to the Trustees shall be solely in that capacity in
accordance with the rights conferred upon them hereunder.
SECTION 1.4. Definitions. As used in this Agreement and Declaration of
Trust, the following terms shall have the meanings set forth below unless the
context thereof otherwise requires:
"Accounting Agent" shall have the meaning designated in Section 5.2(g)
hereof.
"Administrator" shall have the meaning designated in Section 5.2(b)
hereof.
"Affiliated Person" shall have the meaning assigned to it in the 1940 Act.
"By-Laws" shall mean the By-Laws of the Trust, as amended from time to
time.
"Certificate of Designation" shall have the meaning designated in Section
6.1 hereof.
"Certificate of Termination" shall have the meaning designated in Section
6.1 hereof.
"Class" or "Classes" shall mean, with respect to any Series, any unissued
Shares of such Series in respect of which the Trustees shall from time to time
fix and determine any special provisions relating to sales charges, any rights
of redemption and the price, terms and manner of redemption, special and
relative rights as to dividends and other distributions and on liquidation,
sinking or purchase fund
2
<PAGE> 9
provisions, conversion rights, and conditions under which the Shareholders of
such Class shall have separate voting rights or no voting rights.
"Commission" shall have the same meaning as in the 1940 Act.
"Contracting Party" shall have the meaning designated in the preamble to
Section 5.2 hereof.
"Conversion Date" shall mean with respect to Shares of any Class that are
convertible automatically into Shares of any other Class of a Series the date
fixed by the Trustees for such conversion.
"Covered Person" shall have the meaning designated in Section 8.4 hereof.
"Custodian" shall have the meaning designated in Section 5.2(d) hereof.
"Declaration" and "Declaration of Trust" shall mean this Agreement and
Declaration of Trust and all amendments or modifications thereof as from time
to time in effect. This Agreement and Declaration of Trust is the "governing
instrument" of the Trust within the meaning of the laws of the State of
Delaware with respect to Delaware business trusts. References in this
Agreement and Declaration of Trust to "hereof", "herein" and "hereunder" shall
be deemed to refer to the Declaration of Trust generally, and shall not be
limited to the particular text, Article or Section in which such words appear.
"Disabling Conduct" shall have the meaning designated in Section 8.4
hereof.
"Distributor" shall have the meaning designated in Section 5.2(c) hereof.
"Dividend Disbursing Agent" shall have the meaning designated in Section
5.2(e) hereof.
"General Items" shall have the meaning defined in Section 6.2(a) hereof.
"Initial Trustee" shall have the meaning defined in the preamble hereto.
"Investment Advisor" shall have the meaning defined in Section 5.2(a)
hereof.
"Majority of the Trustees" shall mean a majority of the Trustees in office
at the time in question. At any time at which there shall be only one (1)
Trustee in office, such term shall mean such Trustee.
"Majority Shareholder Vote," as used with respect to (a) the election of
any Trustee at a meeting of Shareholders, shall mean the vote for the election
of such Trustee of a plurality of all outstanding Shares of the Trust, without
regard to Series, represented in person or by proxy and entitled to vote
thereon, provided that a quorum (as determined in accordance with the By-Laws)
is present, (b) any other action required or permitted to be taken by
Shareholders, shall mean the vote for such action of the holders of that
majority of all outstanding Shares (or, where a separate vote of Shares of any
particular Series is to be taken, the affirmative vote of that majority of the
outstanding Shares of that Series) of the Trust which consists of: (i) a
majority of all Shares (or of Shares of the particular Series) represented in
person or by proxy and entitled to vote on such action at the meeting of
Shareholders at which such action is to be taken, provided that a quorum (as
determined in accordance with the By-Laws) is present; or (ii) if such action
is to be taken by written consent of Shareholders, a majority of all Shares (or
of Shares of the particular Series) issued and outstanding and entitled to vote
on such action; provided that (iii) as used with respect to any action
requiring the affirmative vote of "a majority of the outstanding voting
3
<PAGE> 10
securities," as the quoted phrase is defined in the 1940 Act, of the Trust or
of any Series, "Majority Shareholder Vote" means the vote for such action at a
meeting of Shareholders of the smallest majority of all outstanding Shares of
the Trust (or of Shares of the particular Series) entitled to vote on such
action which satisfies such 1940 Act voting requirement.
"1940 Act" shall mean the provisions of the Investment Company Act of 1940
and the rules and regulations thereunder, both as amended from time to time,
and any order or orders thereunder which may from time to time be applicable to
the Trust.
"Person" shall mean and include individuals, as well as corporations,
limited partnerships, general partnerships, joint stock companies, joint
ventures, associations, banks, trust companies, land trusts, business trusts or
other organizations established under the laws of any jurisdiction, whether or
not considered to be legal entities, and governments and agencies and political
subdivisions thereof.
"Principal Underwriter" shall have the meaning designated in Section
5.2(c) hereof.
"Prospectus," as used with respect to the Trust (or the Shares of a
particular Series), shall mean the prospectus relating to the Trust (or such
Series) which constitutes part of the currently effective Registration
Statement of the Trust under the Securities Act of 1933, as such prospectus may
be amended or supplemented from time to time.
"Securities" shall have the same meaning ascribed to that term in the
Securities Act of 1993.
"Series" shall mean one or more of the series of Shares authorized by the
Trustees to represent the beneficial interest in one or more separate
components of the assets of the Trust which are now or hereafter established
and designated under or in accordance with the provisions of Article 6 hereof.
"Settlor" shall have the meaning defined in the preamble hereto.
"Shareholder" shall mean as of any particular time any Person shown of
record at such time on the books of the Trust as a holder of outstanding Shares
of any Series, and shall include a pledgee into whose name any such Shares are
transferred in pledge.
"Shareholder Servicing Agent" shall have the meaning designated in Section
5.2(f) hereof.
"Shares" shall mean the transferable units into which the beneficial
interest in the Trust and each Series of the Trust (as the context may require)
shall be divided from time to time, and includes fractions of Shares as well as
whole Shares. All references herein to "Shares" which are not accompanied by a
reference to any particular Series or Class shall be deemed to apply to
outstanding Shares without regard to Series or Class.
"Single Class Voting," as used with respect to any matter to be acted upon
at a meeting or by written consent of Shareholders, shall mean a style of
voting in which each holder of one or more Shares shall be entitled to one vote
on the matter in question for each Share standing in his name on the records of
the Trust, irrespective of Series or Class of a Series, and all outstanding
Shares of all Series vote as a single class.
"Statement of Additional Information," as used with respect to the Trust
(or any Series), shall mean the statement of additional information relating to
the Trust (or such Series) which constitutes part of the
4
<PAGE> 11
currently effective Registration Statement of the Trust under the Securities
Act of 1933, as such statement of additional information may be amended or
supplemented from time to time.
"Transfer Agent" shall have the meaning defined in Section 5.2(e) hereof.
"Trust" shall mean the trust named in Section 1.1 hereof.
"Trust Property" shall mean, as of any particular time, any and all
property which shall have been transferred, conveyed or paid to the Trust or
the Trustees, and all interest, dividends, income, earnings, profits and gains
therefrom, and proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation thereof, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, and which at
such time is owned or held by, or for the account of, the Trust or the
Trustees, without regard to the Series to which such property is allocated.
"Trustees" shall mean, collectively, the Initial Trustee, so long as he
shall continue in office, and all other individuals who at the time in question
have been duly elected or appointed as Trustees of the Trust in accordance with
the provisions hereof and who have qualified and are then in office. At any
time at which there shall be only one (I) Trustee in office, such term shall
mean such single Trustee.
SECTION 1.5. Real Property to be Converted into Personal Property.
Notwithstanding any other provision hereof, any real property at any time
forming part of the Trust Property shall be held in trust for sale and
conversion into personal property at such time or times and in such manner and
upon such terms as the Trustees shall approve, but the Trustees shall have
power until the termination of this Trust to postpone such conversion as long
as they in their uncontrolled discretion shall think fit, and for the purpose
of determining the nature of the interest of the Shareholders therein, all such
real property shall at all times be considered as personal property.
ARTICLE 2
PURPOSE OF THE TRUST
The purpose of the Trust shall be to (a) manage, conduct, operate and
carry on the business of an investment company; (b) subscribe for, invest in,
reinvest in, purchase or otherwise acquire, hold, pledge, sell, assign,
transfer, exchange, distribute or otherwise deal in or dispose of any and all
sorts of property, tangible or intangible, including but not limited to
Securities of any type whatsoever, whether equity or nonequity, of any issuer,
evidences of indebtedness of any person and any other rights, interest,
instruments or property of any sort to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investment
of every kind and description, including without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more Persons to exercise any of said rights, powers and privileges in respect
of any of said investments. The Trustees shall not be limited by any law
limiting the investments which may be made by fiduciaries.
5
<PAGE> 12
ARTICLE 3
POWERS OF THE TRUSTEES
SECTION 3.1. Powers in General. The Trustees shall have, without other or
further authorization, full, entire, exclusive and absolute power, control and
authority over, and management of, the business of the Trust and over the Trust
Property, to the same extent as if the Trustees were the sole owners of the
business and property of the Trust in their own right, and with such powers of
delegation as may be permitted by this Declaration, subject only to such
limitations as may be expressly imposed by this Declaration of Trust or by
applicable law. The enumeration of any specific power or authority herein shall
not be construed as limiting the aforesaid power or authority or any specific
power or authority. Without limiting the foregoing; they may select, and from
time to time change, the fiscal year of the Trust; they may adopt and use a
seal for the Trust, provided that unless otherwise required by the Trustees, it
shall not be necessary to place the seal upon, and its absence shall not impair
the validity of, any document, instrument or other paper executed and delivered
by or on behalf of the Trust; they may from time to time in accordance with the
provisions of Section 6.1 hereof establish one or more Series to which they may
allocate such of the Trust Property, subject to such liabilities, as they shall
deem appropriate, each such Series to be operated by the Trustees as a separate
and distinct investment medium and with separately defined investment
objectives and policies and distinct investment purposes, all as established by
the Trustees, or from time to time changed by them; they may as they consider
appropriate elect and remove officers and appoint and terminate agents and
consultants and hire and terminate employees, any one or more of the foregoing
of whom may be a Trustee; they may appoint from their own number, and
terminate, any one or more committees consisting of one or more Trustees,
including without implied limitation an Executive Committee, which may, when
the Trustees are not in session and subject to the 1940 Act, exercise some or
all of the power and authority of the Trustees as the Trustees may determine;
in accordance with Section 5.2 they may employ one or more Investment Advisers,
Administrators and Custodians and may authorize any such service provider to
employ one or more other service providers and to deposit all or any part of
such assets in a system or systems for the central handling of Securities,
retain Transfer, Dividend Disbursing, Accounting or Shareholder Servicing
Agents or any of the foregoing, provide for the distribution of Shares by the
Trust through one or more Distributors, Principal Underwriters or otherwise,
set record dates or times for the determination of Shareholders entitled to
participate in, benefit from or act with respect to various matters; and in
general they may delegate to any officer of the Trust, to any Committee of the
Trustees and to any employee, Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, Dividend Disbursing Agent, or any other agent or
consultant of the Trust, such authority, powers, functions and duties as they
consider desirable or appropriate for the conduct of the business and affairs
of the Trust, including without implied limitation the power and authority to
act in the name of the Trust and of the Trustees, to sign documents and to act
as attorney-in-fact for the Trustees. Without limiting the foregoing and to the
extent not inconsistent with the 1940 Act or other applicable law, the Trustees
shall have power and authority:
(a) Investments. To subscribe for, invest in, reinvest in, purchase or
otherwise acquire, hold, pledge, sell, assign, transfer, exchange, distribute
or otherwise deal in or dispose of any and all sorts of property, tangible or
intangible, including but not limited to Securities of any type whatsoever,
whether equity or nonequity, of any issuer, evidences of indebtedness of any
person and any other rights, interest, instruments or property of any sort, to
exercise any and all rights, powers and privileges of ownership or interest in
respect of any and all such investments of every kind and description,
including without limitation the right to consent and otherwise act with
respect thereto, with power to designate one or more
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Persons to exercise any of said rights, powers and privileges in respect of any
of said investments, in every case without being limited by any law limiting
the investments which may be made by fiduciaries;
(b) Disposition of Assets. Upon such terms and conditions as they deem
best, to lend, sell, exchange, mortgage, pledge, hypothecate, grant security
interests in, encumber, negotiate, convey, transfer or otherwise dispose of,
and to trade in, any and all of the Trust Property, free and clear of all
trusts, for cash or on terms, with or without advertisement, and on such terms
as to payment, security or otherwise, all as they shall deem necessary or
expedient;
(c) Ownership Powers. To vote or give assent, or exercise any and all
other rights, powers and privileges of ownership with respect to, and to
perform any and all duties and obligations as owners of, any Securities or
other property forming part of the Trust Property, the same as any individual
might do; to exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of Securities, and to receive powers of
attorney from, and to execute and deliver proxies or powers of attorney to,
such Person or Persons as the Trustees shall deem proper, receiving from or
granting to such Person or Persons such power and discretion with relation to
Securities or other property of the Trust, all as the Trustees shall deem
proper;
(d) Form of Holding. To hold any Security or other property in a form not
indicating any trust, whether in bearer, unregistered or other negotiable form,
or in the name of the Trustees or of the Trust, or of the Series to which such
Securities or property belong, or in the name of a Custodian, subcustodian or
other nominee or nominees, or otherwise, upon such terms, in such manner or
with such powers, as the Trustees may determine, and with or without indicating
any trust or the interest of the Trustees therein;
(e) Reorganizations etc. To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer, any
Security of which is or was held in the Trust or any Series; to consent to any
contract, lease, mortgage, purchase or sale of property by such corporation or
issuer, and to pay calls or subscriptions with respect to any Security forming
part of the Trust Property;
(f) Voting Trusts, etc. To join with other holders of any Securities in
acting through a committee, depository, voting trustee or otherwise, and in
that connection to deposit any Security with, or transfer any Security to, any
such committee, depository or trustee, and to delegate to them such power and
authority with relation to any Security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to
pay, such portion of the expenses and compensation of such committee,
depository or trustee as the Trustees shall deem proper;
(g) Contracts. etc. To enter into, make and perform all such obligations,
contracts, agreements and undertakings of every kind and description, with any
Person or Persons, as the Trustees shall in their discretion deem expedient in
the conduct of the business of the Trust, for such terms as they shall see fit,
whether or not extending beyond the term of office of the Trustees, or beyond
the possible expiration of the Trust; to amend, extend, release or cancel any
such obligations, contracts, agreements or understandings; and to execute,
acknowledge, deliver and record all written instruments which they may deem
necessary or expedient in the exercise of their powers;
(h) Guarantees. etc. To endorse or guarantee the payment of any notes or
other obligations of any Person; to make contracts of guaranty or suretyship,
or otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust Property or any part thereof to secure any of or all such
obligations;
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(i) Partnerships, etc. To enter into joint ventures, general or limited
partnerships and any other combinations or association;
(j) Insurance. To purchase and pay for entirely out of Trust Property such
insurance as they may deem necessary or appropriate for the conduct of the
business, including, without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, consultants, Investment Advisers, managers,
Administrators, Distributors, Principal Underwriters, or other independent
contractors, or any thereof (or any Person connected therewith), of the Trust,
individually, against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such Person
in any such capacity, whether or not the Trust would have the power to
indemnify such Person against such liability;
(k) Pensions, etc. To pay pensions for faithful service, as deemed
appropriate by the Trustees, and to adopt, establish and carry out pension,
profit sharing, share bonus, share purchase, savings, thrift, deferred
compensation and other retirement, incentive and benefit plans, trusts and
provisions, including the purchasing of life insurance and annuity contracts as
a means of providing such retirement and other benefits, for any or all of the
Trustees, officers, employees and agents of the Trust;
(l) Power of Collection and Litigation. To collect, sue for and receive
all sums of money coming due to the Trust, to employ counsel, and to commence,
engage in, prosecute, intervene in, join, defend, compound, compromise, adjust
or abandon, in the name of the Trust, any and all actions, suits, proceedings,
disputes, claims, controversies, demands or other litigation or legal
proceedings relating to the Trust, the business of the Trust, the Trust
Property, or the Trustees, officers, employees, agents and other independent
contractors of the Trust, in their capacity as such, at law or in equity, or
before any other bodies or tribunals, and to compromise, arbitrate or otherwise
adjust any dispute to which the Trust may be a party, whether or not any suit
is commenced or any claim shall have been made or asserted. Except to the
extent required for a Delaware business trust, the Shareholders shall have no
power to vote as to whether or not a court action, legal proceeding or claim
should or should not be brought or maintained derivatively or as a class action
on behalf of the Trust or the Shareholders.
(m) Issuance and Repurchase of Shares. To authorize, issue, sell,
repurchase, redeem, retire, cancel, acquire, hold, resell, reissue, dispose of,
transfer, and otherwise deal in Shares of any Series, and, subject to Article 6
hereof, to apply to any such repurchase, redemption, retirement, cancellation
or acquisition of Shares of any Series, any of the assets belonging to the
Series to which such Shares relate, whether constituting capital or surplus or
otherwise, to the full extent now or hereafter permitted by applicable law;
provided that any Shares belonging to the Trust shall not be voted, directly or
indirectly;
(n) Offices. To have one or more offices, and to carry on all or any of
the operations and business of the Trust, in any of the States, Districts or
Territories of the United States, and in any and all foreign countries, subject
to the laws of such State, District, Territory or country;
(o) Expenses. To incur and pay any and all such expenses and charges as
they may deem advisable (including without limitation appropriate fees to
themselves as Trustees), and to pay all such sums of money for which they may
be held liable by way of damages, penalty, fine or otherwise;
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(p) Agents, etc. To retain and employ any and all such servants, agents,
employees, attorneys, brokers, Investment Advisers, accountants, architects,
engineers, builders, escrow agents, depositories, consultants, ancillary
trustees, custodians, agents for collection, insurers, banks and officers, as
they think best for the business of the Trust or any Series, to supervise and
direct the acts of any of the same, and to fix and pay their compensation and
define their duties;
(q) Accounts. To determine, and from time to time change, the method or
form in which the accounts of the Trust or any Series shall be kept;
(r) Valuation. Subject to the requirements of the 1940 Act, to determine
from time to time the value of all or any part of the Trust Property and of any
services, Securities, property or other consideration to be furnished to or
acquired by the Trust, and from time to time to revalue all or any part of the
Trust Property in accordance with such appraisals or other information as is,
in the Trustees' sole judgment, necessary and satisfactory;
(s) Indemnification. In addition to the mandatory indemnification provided
for in Article 8 hereof and to the extent permitted by law, to indemnify or
enter into agreements with respect to indemnification with any Person with whom
this Trust has dealings, including, without limitation, any independent
contractor, to such extent as the Trustees shall determine; and
(t) General. Subject to the fundamental policies in effect from time to
time with respect to the Trust, to do all such other acts and things and to
conduct, operate, carry on and engage in such other lawful businesses or
business activities as they shall in their sole and absolute discretion
consider to be incidental to the business of the Trust or any Series as an
investment company, and to exercise all powers which they shall in their
discretion consider necessary, useful or appropriate to carry on the business
of the Trust or any Series, to promote any of the purposes for which the Trust
is formed, whether or not such things are specifically mentioned herein, in
order to protect or promote the interests of the Trust or any Series, or
otherwise to carry out the provisions of this Declaration.
SECTION 3.2. Borrowings; Financings: Issuance of Securities. The Trustees
have power, subject to the fundamental policies in effect from time to time
with respect to the Trust, to borrow or in any other manner raise such sum or
sums of money, and to incur such other indebtedness for goods or services, or
for or in connection with the purchase or other acquisition of property, as
they shall deem advisable for the purposes of the Trust, in any manner and on
any terms, and to evidence the same by negotiable or nonnegotiable Securities
which may mature at any time or times, even beyond the possible date of
termination of the Trust; to issue Securities of any type for such cash,
property, services or other considerations, and at such time or times and upon
such terms, as they may deem advisable; and to reacquire any such Securities.
Any such Securities of the Trust may, at the discretion of the Trustees, be
made convertible into Shares of any Series, or may evidence the right to
purchase, subscribe for or otherwise acquire Shares of any Series, at such
times and on such terms as the Trustees may prescribe.
SECTION 3.3. Deposits. Subject to the requirements of the 1940 Act, the
Trustees shall have power to deposit any moneys or Securities included in the
Trust Property with any one or more banks, trust companies or other banking
institutions, whether or not such deposits will draw interest. Such deposits
are to be subject to withdrawal in such manner as the Trustees may determine,
and the Trustees shall have no responsibility for any loss which may occur by
reason of the failure of the bank, trust company or other banking institution
with which any such moneys or Securities have been deposited, except as
provided in Section 8.2 hereof.
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SECTION 3.4. Allocations. The Trustees shall have power to determine
whether moneys or other assets received by the Trust shall be charged or
credited to income or capital, or allocated between income and capital,
including the power to amortize or fail to amortize any part or all of any
premium or discount, to treat any part or all of the profit resulting from the
maturity or sale of any asset, whether purchased at a premium or at a discount,
as income or capital, or to apportion the same between income and capital, to
apportion the sale price of any asset between income and capital, and to
determine in what manner any expenses or disbursements are to be borne as
between income and capital, whether or not in the absence of the power and
authority conferred by this Section 3.4 such assets would be regarded as income
or as capital or such expense or disbursement would be charged to income or to
capital; to treat any dividend or other distribution on any investment as
income or capital, or to apportion the same between income and capital; to
provide or fail to provide reserves, including reserves for depreciation,
amortization or obsolescence in respect of any Trust Property in such amounts
and by such methods as they shall determine; to allocate less than all of the
consideration paid for Shares of any Series to surplus with respect to the
Series to which such Shares relate and to allocate the balance thereof to
paid-in capital of that Series, and to reallocate such amounts from time to
time; all as the Trustees may reasonably deem proper.
SECTION 3.5. Further Powers: Limitations. The Trustees shall have power to
do all such other matters and things, and to execute all such instruments, as
they deem necessary, proper or desirable in order to carry out, promote or
advance the interests of the Trust, although such matters or things are not
herein specifically mentioned. Any determination as to what is in the interests
of the Trust made by the Trustees in good faith shall be conclusive. In
construing the provisions of this Declaration of Trust, the presumption shall
be in favor of a grant of power to the Trustees. The Trustees shall not be
required to obtain any court order to deal with the Trust Property. The
Trustees may limit their right to exercise any of their powers through express
restrictive provisions in the instruments evidencing or providing the terms for
any Securities of the Trust or in other contractual instruments adopted on
behalf of the Trust.
ARTICLE 4
TRUSTEES AND OFFICERS
SECTION 4.1. Number. Designation, Election. Term, etc.
(a) Initial Trustee. Upon his execution of this Declaration of Trust or a
counterpart hereof or some other writing in which he accepts such Trusteeship
and agrees to the provisions hereof, the individual whose signature is affixed
hereto as Initial Trustee shall become the Initial Trustee hereof.
(b) Number. The Trustees serving as such, whether named above or hereafter
becoming Trustees, may increase (to not more than twenty (20)) or decrease the
number of Trustees to a number other than the number theretofore determined by
a written instrument signed by a Majority of the Trustees (or by an officer of
the Trust pursuant to the vote of a Majority of the Trustees). No decrease in
the number of Trustees shall have the effect of removing any Trustee from
office prior to the expiration of his term, but the number of Trustees may be
decreased in conjunction with the removal of a Trustee pursuant to subsection
(e) of this Section 4.1.
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(c) Election and Term. The Trustees shall be elected by the Shareholders
of the Trust at the first meeting of Shareholders immediately prior to the
initial public offering of Shares of the Trust, and the term of office of any
Trustees in office before such election shall terminate at the time of such
election. Subject to Section 16(a) of the 1940 Act and to the preceding
sentence of this subsection (c), the Trustees shall have the power to set and
alter the terms of office of the Trustees, and at any time to lengthen or
shorten their own terms or make their terms of unlimited duration, to elect
their own successors and, pursuant to subsection (f) of this Section 4.1, to
appoint Trustees to fill vacancies; provided that Trustees shall be elected by
a Majority Shareholder Vote at any such time or times as the Trustees shall
determine that such action is required under Section 16(a) of the 1940 Act or,
if not so required, that such action is advisable; and further provided that,
after the initial election of Trustees by the Shareholders, the term of office
of any incumbent Trustee shall continue until the termination of this Trust or
his earlier death, resignation, retirement, bankruptcy, adjudicated
incompetency or other incapacity or removal, or if not so terminated, until the
election of such Trustee's successor in office has become effective in
accordance with this subsection (c).
(d) Resignation and Retirement. Any Trustee may resign his trust or retire
as a Trustee, by a written instrument signed by him and delivered to the other
Trustees or to any officer of the Trust, and such resignation or retirement
shall take effect upon such delivery or upon such later date as is specified in
such instrument.
(e) Removal. Any Trustee may be removed with or without cause at any time:
(i) by written instrument, signed by at least two thirds (2/3) of the number of
Trustees prior to such removal, specifying the date upon which such removal
shall become effective; or (ii) by vote of Shareholders holding not less than
two thirds (2/3) of the Shares of each Series then outstanding, cast in person
or by proxy at any meeting called for the purpose; or (iii) by a written
declaration signed by Shareholders holding not less than two thirds (2/3) of
the Shares of each Series then outstanding. Upon incapacity or death of any
Trustee, his legal representative shall execute and deliver on his behalf such
documents as the remaining Trustees shall require in order to effect the
purpose of this Paragraph.
(f) Vacancies. Any vacancy or anticipated vacancy resulting from any
reason, including an increase in the number of Trustees, may (but need not
unless required by the 1940 Act) be filled by a Majority of the Trustees,
subject to the provisions of Section 16(a) of the 1940 Act, through the
appointment in writing of such other individual as such remaining Trustees in
their discretion shall determine; provided that if there shall be no Trustees
in office, such vacancy or vacancies shall be filled by Majority Shareholders
Vote. Any such appointment or election shall be effective upon such
individual's written acceptance of his appointment as a Trustee and his
agreement to be bound by the provisions of this Declaration of Trust, except
that any such appointment in anticipation of a vacancy to occur by reason of
retirement, resignation or increase in the number of Trustees to be effective
at a later date shall become effective only at or after the effective date of
said retirement, resignation or increase in the number of Trustees.
(g) Acceptance of Trusts. Whenever any conditions to the appointment or
election of any individual as a Trustee hereunder who was not, immediately
prior to such appointment or election, acting as a Trustee shall have been
satisfied, such individual shall become a Trustee and the Trust estate shall
vest in the new Trustee, together with the continuing Trustees, without any
further act or conveyance. Such new Trustee shall accept such appointment or
election in writing and agree in such writing to be bound
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by the provisions hereof, but the execution of such writing shall not be
requisite to the effectiveness of the appointment or election of a new Trustee.
(h) Effect of Death. Resignation, etc. No vacancy, whether resulting from
the death, resignation, retirement, bankruptcy, adjudicated incompetency,
incapacity, or removal of any Trustee, an increase in the number of Trustees or
otherwise, shall operate to annul or terminate the Trust hereunder or to revoke
or terminate any existing agency or contract created or entered into pursuant
to the terms of this Declaration of Trust. Until such vacancy is filled as
provided in this Section 4.1, the Trustees in office (if any), regardless of
their number, shall have all the powers granted to the Trustees and shall
discharge all the duties imposed upon the Trustees by this Declaration.
(i) Conveyance. In the event of the resignation or removal of a Trustee
or his otherwise ceasing to be a Trustee, such former Trustee or his legal
representative shall, upon request of the continuing Trustees, execute and
deliver such documents as may be required for the purpose of consummating or
evidencing the conveyance to the Trust or the remaining Trustees of any Trust
Property held in such former Trustee's name, but the execution and delivery of
such documents shall not be requisite to the vesting of title to the Trust
Property in the remaining Trustees, as provided in subsection (g) of this
Section 4.1 and in Section 4.13 hereof.
(j) No Accounting. Except to the extent required by the 1940 Act or under
circumstances which would justify his removal for cause, no Person ceasing to
be a Trustee (nor the estate of any such Person) shall be required to make an
accounting to the Shareholders or remaining Trustees upon such cessation.
SECTION 4.2. Trustees' Meetings: Participation by Telephone. etc. Annual
and special meetings may be held from time to time, in each case, upon the call
of such officers as may be thereunto authorized by the By-Laws or vote of the
Trustees, or by any three (3) Trustees, or pursuant to a vote of the Trustees
adopted at a duly constituted meeting of the Trustees, and upon such notice as
shall be provided in the By-Laws. Any such meeting may be held within or
without the state of Delaware. The Trustees may act with or without a meeting,
and a written consent to any matter, signed by a Majority of the Trustees,
shall be equivalent to action duly taken at a meeting of the Trustees, duly
called and held. Except as otherwise provided by the 1940 Act or other
applicable law, or by this Declaration of Trust or the By-Laws, any action to
be taken by the Trustees may be taken by a majority of the Trustees present at
a meeting of Trustees (a quorum, consisting of at least a Majority of the
Trustees, being present), within or without Delaware. If authorized by the
By-Laws, all or any one or more Trustees may participate in a meeting of the
Trustees or any Committee thereof by means of conference telephone or similar
means of communication by means of which all Persons participating in the
meeting can hear each other, and participation in a meeting pursuant to such
means of communication shall constitute presence in person at such meeting. The
minutes of any meeting thus held shall be prepared in the same manner as a
meeting at which all participants were present in person.
SECTION 4.3. Committees; Delegation. The Trustees shall have power,
consistent with their ultimate responsibility to supervise the affairs of the
Trust, to delegate from time to time to one or more other Committees, or to any
single Trustee, the doing of such things and the execution of such deeds or
other instruments, either in the name of the Trust or the names of the Trustees
or as their attorney or attorneys in fact, or otherwise as the Trustees may
from time to time deem expedient, and any agreement, deed, mortgage, lease or
other instrument or writing executed by the Trustee or Trustees or other Person
to whom such delegation was made shall be valid and binding upon the Trustees
and upon the Trust.
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SECTION 4.4. Officers. The Trustees shall annually elect such officers or
agents, who shall have such powers, duties and responsibilities as the Trustees
may deem to be advisable, and as they shall specify by resolution or in the
By-Laws. Except as may be provided in the By-Laws, any officer elected by the
Trustees may be removed at any time with or without cause. Any two (2) or more
offices may be held by the same individual.
SECTION 4.5. Compensation of Trustees and Officers. The Trustees shall fix
the compensation of all officers and Trustees. Without limiting the generality
of any of the provisions hereof, the Trustees shall be entitled to receive
reasonable compensation for their general services as such, and to fix the
amount of such compensation, and to pay themselves or any one or more of
themselves such compensation for special services, including legal, accounting,
or other professional services, as they in good faith may deem reasonable. No
Trustee or officer resigning (except where a right to receive compensation for
a definite future period shall be expressly provided in a written agreement
with the Trust, duly approved by the Trustees) and no Trustee or officer
removed shall have any right to any compensation as such Trustee or officer for
any period following his resignation or removal, or any right to damages on
account of his removal, whether his compensation be by the month, or the year
or otherwise.
SECTION 4.6. Ownership of Shares and Securities of the Trust. Any Trustee,
and any officer, employee or agent of the Trust, and any organization in which
any such Person is interested, may acquire, own, hold and dispose of Shares of
any Series and other Securities of the Trust for his or its individual account,
and may exercise all rights of a holder of such Shares or Securities to the
same extent and in the same manner as if such Person were not such a Trustee,
officer, employee or agent of the Trust; subject, in the case of Trustees and
officers, to the same limitations as directors or officers (as the case may be)
of a Delaware business corporation; and the Trust may issue and sell or cause
to be issued and sold and may purchase any such Shares or other Securities from
any such Person or any such organization, subject only to the general
limitations, restrictions or other provisions applicable to the sale or
purchase of Shares of such Series or other Securities of the Trust generally.
SECTION 4.7. Right of Trustees and Officers to Own Property or to Engage
in Business; Authority of Trustees to Permit Others to Do Likewise. The
Trustees, in their capacity as Trustees, and (unless otherwise specifically
directed by vote of the Trustees) the officers of the Trust in their capacity
as such, shall not be required to devote their entire time to the business and
affairs of the Trust. Except as otherwise specifically provided by vote of the
Trustees, or by agreement in any particular case, any Trustee or officer of the
Trust may acquire, own, hold and dispose of, for his own individual account,
any property, and acquire, own, hold, carry on and dispose of, for his own
individual account, any business entity or business activity, whether similar
or dissimilar to any property or business entity or business activity invested
in or carried on by the Trust, and without first offering the same as an
investment opportunity to the Trust, and may exercise all rights in respect
thereof as if he were not a Trustee or officer of the Trust. The Trustees shall
also have power, generally or in specific cases, to permit employees or agents
of the Trust to have the same rights (or lesser rights) to acquire, hold, own
and dispose of property and businesses, to carry on businesses, and to accept
investment opportunities without offering them to the Trust, as the Trustees
have by virtue of this Section 4.7.
SECTION 4.8. Reliance on Experts. The Trustees and officers may consult
with counsel, engineers, brokers, appraisers, auctioneers, accountants,
investment bankers, securities analysts or other Persons (any of which may be a
firm in which one or more of the Trustees or officers is or are members or
otherwise interested) whose profession gives authority to a statement made by
them on the subject in
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question, and who are reasonably deemed by the Trustees or officers in question
to be competent, and the advice or opinion of such Persons shall be full and
complete personal protection to all of the Trustees and officers in respect of
any action taken or suffered by them in good faith and in reliance on or in
accordance with such advice or opinion. In discharging their duties, Trustees
and officers, when acting in good faith, may rely upon financial statements of
the Trust represented to them to be correct by any officer of the Trust having
charge of its books of account, or stated in a written report by an independent
certified public accountant fairly to present the financial position of the
Trust. The Trustees and officers may rely, and shall be personally protected in
acting, upon any instrument or other document believed by them to be genuine.
SECTION 4.9. Surety Bonds. No Trustee, officer, employee or agent of the
Trust shall, as such, be obligated to give any bond or surety or other security
for the performance of any of his duties, unless required by applicable law or
regulation, or unless the Trustees shall otherwise determine in any particular
case.
SECTION 4.10. Apparent Authority of Trustees and Officers. No purchaser,
lender, transfer agent or other Person dealing with the Trustees or any officer
of the Trust shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by such officer, or to
make inquiry concerning or be liable for the application of money or property
paid, loaned or delivered to or on the order of the Trustees or of such
officer.
SECTION 4.11. Other Relationships Not Prohibited. The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust is a
shareholder, director, officer, partner, trustee, employee, manager, adviser,
principal underwriter or distributor or agent of or for any Contracting Party
(as defined in Section 5.2 hereof), or of or for any parent or affiliate of
any Contracting Party, or that the Contracting Party or any parent or
affiliate thereof is a Shareholder or has an interest in the Trust or any
Series, or that
(ii) any Contracting Party may have a contract providing for the
rendering of any similar services to one or more other corporations, trusts,
associations, partnerships, limited partnerships or other organizations, or
have other business or interests, shall not affect the validity of any
contract for the performance and assumption of services, duties and
responsibilities to, for or of the Trust and/or the Trustees or disqualify
any Shareholder, Trustee or officer of the Trust from voting upon or
executing the same or create any liability or accountability to the Trust or
to the holders of Shares of any Series; provided that, in the case of any
relationship or interest referred to in the preceding clause (i) on the part
of any Trustee or officer of the Trust, either (x) the material facts as to
such relationship or interest have been disclosed to or are known by the
Trustees not having any such relationship or interest and the contract
involved is approved in good faith by a majority of such Trustees not having
any such relationship or interest (even though such unrelated or
disinterested Trustees are less than a quorum of all of the Trustees), (y)
the material facts as to such relationship or interest and as to the contract
have been disclosed to or are known by the Shareholders entitled to vote
thereon and the contract involved is specifically approved in good faith by
vote of the Shareholders, or (z) the specific contract involved is fair to
the Trust as of the time it is authorized, approved or ratified by the
Trustees or by the Shareholders.
SECTION 4.12. Payment of Trust Expenses. The Trustees are authorized to
pay or to cause to be paid out of the principal or income of the Trust, or
partly out of principal and partly out of income, and
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according to any allocation to a particular Series and Class made by them
pursuant to Section 6.1(f) hereof, all expenses, fees, charges, taxes and
liabilities incurred or arising in connection with the business and affairs of
the Trust or in connection with the management thereof, including, but not
limited to, the Trustees' compensation and such expenses and charges for the
services of the Trust's officers, employees, Investment Adviser, Administrator,
Distributor, Principal Underwriter, auditor, counsel, Custodian, Transfer
Agent, Dividend Disbursing Agent, Accounting Agent, Shareholder Servicing
Agent, and such other agents, consultants, and independent contractors and such
other expenses and charges as the Trustees may deem necessary or proper to
incur.
SECTION 4.13. Ownership of the Trust Property. Legal title to all the
Trust Property shall be vested in the Trustees as joint tenants, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or of any particular Series, or in the name of any other Person as
nominee, on such terms as the Trustees may determine; provided that the
interest of the Trust and of the respective Series therein is appropriately
protected. The right, title and interest of the Trustees in the Trust Property
shall vest automatically in each Person who may hereafter become a Trustee.
Upon the termination of the term of office of a Trustee as provided in Section
4.1(c), (d) or (e) hereof, such Trustee shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title and
interest of such Trustee in the Trust Property shall vest automatically in the
remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered pursuant
to Section 4.1(i) hereof.
SECTION 4.14. By-Laws. The Trustees may adopt and from time to time amend
or repeal By-Laws for the conduct of the business of the Trust.
ARTICLE 5
DELEGATION OF MANAGERIAL RESPONSIBILITIES
SECTION 5.1. Appointment; Action by Less than All Trustees. The Trustees
shall be responsible for the general operating policy of the Trust and for the
general supervision of the business of the Trust conducted by officers, agents,
employees or advisers of the Trust or by independent contractors, but the
Trustees shall not be required personally to conduct all the business of the
Trust and, consistent with their ultimate responsibility as stated herein, the
Trustees may appoint, employ or contract with one or more officers, employees
and agents to conduct, manage and/or supervise the operations of the Trust, and
may grant or delegate such authority to such officers, employees and/or agents
as the Trustees may, in their sole discretion, deem to be necessary or
desirable, without regard to whether such authority is normally granted or
delegated by trustees. With respect to those matters of the operation and
business of the Trust which they shall elect to conduct themselves, except as
otherwise provided by this Declaration or the By-Laws, if any, the Trustees may
authorize any single Trustee or defined group of Trustees, or any committee
consisting of a number of Trustees less than the whole number of Trustees then
in office without specification of the particular Trustees required to be
included therein, to act for and to bind the Trust, to the same extent as the
whole number of Trustees could do, either with respect to one or more
particular matters or classes of matters, or generally.
SECTION 5.2. Certain Contracts. Subject to compliance with the provisions
of the 1940 Act, but notwithstanding any limitations of present and future law
or custom in regard to delegation of powers by
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trustees generally, the Trustees may, at any time and from time to time in
their discretion and without limiting the generality of their powers and
authority otherwise set forth herein, enter into one or more contracts with any
one or more corporations, trusts, associations, partnerships, limited
partnerships or other types of organizations, or individuals ("Contracting
Party"), to provide for the performance and assumption of some or all of the
following services, duties and responsibilities to, for or on behalf of the
Trust and/or any Series, and/or the Trustees, and to provide for the
performance and assumption of such other services, duties and responsibilities
in addition to those set forth below, as the Trustees may deem appropriate:
(a) Advisory. An investment advisory or management agreement whereby the
agent shall undertake to furnish each Series of the Trust such management,
investment advisory or supervisory, statistical and research facilities and
services, and such other facilities and services, if any, as the Trustees
shall from time to time consider desirable, all upon such terms and conditions
as the Trustees may in their discretion determine to be not inconsistent with
this Declaration, the applicable provisions of the 1940 Act or any applicable
provisions of the By-Laws (any such agent being herein referred to as an
"Investment Adviser"). To the extent required by the 1940 Act, any such
advisory or management agreement and any amendment thereto shall be subject to
approval by a Majority Shareholder Vote at a meeting of the Shareholders of
the applicable Series of the Trust. Notwithstanding any provisions of this
Declaration, the Trustees may authorize the Investment Adviser (subject to
such general or specific instructions as the Trustees may from time to time
adopt) to effect purchases, sales, loans or exchanges of securities of the
Trust on behalf of the Trustees or may authorize any officer or employee of
the Trust or any Trustee to effect such purchases, sales, loans or exchanges
pursuant to recommendations of the Investment Adviser (and all without further
action by the Trustees). Any such purchases, sales, loans and exchanges shall
be deemed to have been authorized by all of the Trustees. The Trustees may, in
their sole discretion, call a meeting of Shareholders in order to submit to a
vote of Shareholders of the applicable Series of Trust at such meeting the
approval of continuance of any such investment advisory or management
agreement.
(b) Administration. An agreement whereby the agent, subject to the
general supervision of the Trustees and in conformity with any policies of the
Trustees with respect to the operations of the Trust and each Series, will
supervise all or any part of the operations of the Trust and each Series, and
will provide all or any part of the administrative and clerical personnel,
office space and office equipment and services appropriate for the efficient
administration and operations of the Trust and each Series (any such agent
being herein referred to as an "Administrator").
(c) Underwriting. An agreement providing for the sale of Shares of any
one or more Series to net the Trust not less than the net asset value per
Share (as described in Section 6.2(l) hereof) and pursuant to which the Trust
may appoint the other party to such agreement as its principal underwriter or
sales agent for the distribution of such Shares. The agreement shall contain
such terms and conditions as the Trustees may in their discretion determine to
be not inconsistent with this Declaration, the applicable provisions of the
1940 Act and any applicable provisions of the By-Laws (any such agent being
herein referred to as a "Distributor" or a "Principal Underwriter," as the
case may be).
(d) Custodian. The appointment of an agent meeting the requirements for a
custodian for the assets of Investment Companies contained in the 1940 Act as
custodian of the Securities and cash of the Trust and of each Series and of
the accounting records in connection therewith (any such agent being herein
referred to as a "Custodian").
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(e) Transfer and Dividend Disbursing Agent. An agreement with an agent to
maintain records of the ownership of outstanding Shares, the issuance and
redemption and the transfer thereof (any such agent being herein referred to
as a "Transfer Agent"), and to disburse any dividends declared by the Trustees
and in accordance with the policies of the Trustees and/or the instructions of
any particular Shareholder to reinvest any such dividends (any such agent
being herein referred to as a "Dividend Disbursing Agent").
(f) Shareholder Servicing. An agreement with an agent to provide service
with respect to the relationship of the Trust and its Shareholders, records
with respect to Shareholders and their Shares, and similar matters (any such
agent being herein referred to as a "Shareholder Servicing Agent").
(g) Accounting. An agreement with an agent to handle all or any part of
the accounting responsibilities, whether with respect to the Trust's
properties, Shareholders or otherwise (any such agent being herein referred to
as an "Accounting Agent").
In addition, the Trustees may from time to time cause the Trust or any Series
thereof to enter into agreements with respect to such other services and upon
such other terms and conditions as they may deem necessary, appropriate or
desirable. The same Person may be the Contracting Party for some or all of the
services, duties and responsibilities to, for and of the Trust and/or the
Trustees, and the contracts with respect thereto may contain such terms
interpretive of or in addition to the delineation of the services, duties and
responsibilities provided for, including provisions that are not inconsistent
with the 1940 Act relating to the standard of duty of and the rights to
indemnification of the Contracting Party and others, as the Trustees may
determine. Nothing herein shall preclude, prevent or limit the Trust or a
Contracting Party from entering into subcontractual arrangements relative to
any of the matters referred to in subsections (a) through (g) of this Section
5.2.
Section 5.3. Distribution Arrangements. Subject to compliance with the
1940 Act, the Trustees may adopt and amend or repeal from time to time and
implement one or more plans of distribution pursuant to Rule 12b-1 of the 1940
Act which plan(s) will provide for the payment of specified marketing,
distribution and shareholder relations expenses of the Trust and any or all
Series and their agents and the agents of such agents.
Section 5.4. Service Arrangements. Subject to compliance with the 1940
Act, the Trustees may adopt and amend or repeal from time to time and implement
one or more service plans which plans will provide for the payment of ongoing
services to holders of the shares of such Trust or any Series thereof and in
connection with the maintenance of such shareholders' accounts.
ARTICLE 6
SERIES AND SHARES
SECTION 6.1. Description of Series and Shares.
(a) General. The beneficial interest in the Trust shall be divided into
Shares (either full or fractional) having $ 0.01 par value per Share, of which
an unlimited number may be issued. The Trustees shall have the authority from
time to time to establish and designate one or more separate, distinct and
independent Series of Shares (each of which Series, including without
limitation each
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Series authorized in Section 6.1(b) hereof, shall represent interests only in
the asset attributed by the Trustees to such Series), and to authorize
separate Classes of Shares of any such Series, as they deem necessary or
desirable. All Shares shall be of one class, provided that the Trustees shall
have the power to classify or reclassify any unissued Shares of any Series
into any number of additional Classes of such Series as set forth in Section
6.1(b).
(b) Establishment. etc. of Series; Authorization of Shares. The
establishment and designation of any Series or Class and the authorization of
the Shares thereof shall be effective upon the execution by a Majority of the
Trustees (or by an officer of the Trust pursuant to the vote of a Majority of
the Trustees) of an instrument setting forth such establishment and
designation and the relative rights and preferences of the Shares of such
Series or Class and the manner in which the same may be amended (a
"Certificate of Designation"), and may provide that the number of Shares of
such Series or Class which may be issued is unlimited, or may limit the number
issuable. At any time that there are no Shares outstanding of any particular
Series or Class previously established and designated, the Trustees may by an
instrument executed by a Majority of the Trustees (or by an officer of the
Trust pursuant to the vote of a Majority of the Trustees) terminate such
Series or Class and the establishment and designation thereof and the
authorization of its Shares (a "Certificate of Termination"). Each Certificate
of Designation, Certificate of Termination and any instrument amending a
Certificate of Designation shall have the status of an amendment to this
Declaration of Trust.
(c) Character of Separate Series and Shares Thereof. Each Series
established hereunder shall represent beneficial interests in a separate
component of the assets of the Trust. Holders of Shares of a Series shall be
considered Shareholders of such Series, but such Shareholders shall also be
considered Shareholders of the Trust for purposes of receiving reports and
notices and, except as otherwise provided herein or in the Certificate of
Designation of a particular Series, or as required by the 1940 Act or other
applicable law, the right to vote, all without distinction by Series. The
Trustees shall have exclusive power without the requirement of Shareholder
approval to establish and designate such separate and distinct Series, and to
fix and determine the relative rights and preferences as between the shares of
the respective Series, and as between the Classes of any Series, as to rights
of redemption and the price, terms and manner of redemption, special and
relative rights as to dividends and other distributions and on liquidation,
sinking or purchase fund provisions, conversion rights, and conditions under
which the Shareholders of the several Series or the several Classes of any
Series of Shares shall have separate voting rights or no voting rights. Except
as otherwise provided as to a particular Series herein, or in the Certificate
of Designation therefor, the Trustees shall have all the rights and powers,
and be subject to all the duties and obligations, with respect to each such
Series and the assets and affairs thereof as they have under this Declaration
with respect to the Trust and the Trust Property in general. Separate and
distinct records shall be maintained for each Series of Shares and the assets
and liabilities attributable thereto.
(d) Consideration for Shares. The Trustees may issue Shares of any Series
for such consideration (which may include property subject to, or acquired in
connection with the assumption of, liabilities) and on such terms as they may
determine (or for no consideration if pursuant to a Share dividend or
split-up), all without action or approval of the Shareholders. All Shares when
so issued on the terms determined by the Trustees shall be fully paid and
nonassessable (but may be subject to mandatory contribution back to the Trust
as provided in Section 6.1(l) hereof. The Trustees may classify or reclassify
any unissued Shares, or any Shares of any Series previously issued and
reacquired by the
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Trust, into Shares of one or more other Series that may be established and
designated from time to time.
(e) Assets Belonging to Series. Any portion of the Trust Property
allocated to a particular Series, and all consideration received by the Trust
for the issue or sale of Shares of such Series, together with all assets in
which such consideration is invested or reinvested, all interest, dividends,
income, earnings, profits and gains therefrom, and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of such assets,
and any funds or payments derived from any reinvestment of such proceeds in
whatever form the same may be, shall be held by the Trustees in trust for the
benefit of the holders of Shares of that Series and shall irrevocably belong
to that Series for all purposes, and shall be so recorded upon the books of
account of the Trust, and the Shareholders of such Series shall not have, and
shall be conclusively deemed to have waived, any claims to the assets of any
Series of which they are not Shareholders. Such consideration, assets,
interest, dividends, income, earnings, profits, gains and proceeds, together
with any General Items allocated to that Series as provided in the following
sentence, are herein referred to collectively as assets "belonging to" that
Series. In the event that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily identifiable as
belonging to any particular Series (collectively, "General Items"), the
Trustees shall allocate such General Items to and among any one or more of the
Series established and designated from time to time in such manner and on such
basis as they, in their sole discretion, deem fair and equitable; and any
General Items so allocated to a particular Series shall belong to and be part
of the assets belonging to that Series. Each such allocation by the Trustees
shall be conclusive and binding upon the Shareholders of all Series for all
purposes.
(f) Liabilities of Series. The assets belonging to each particular Series
shall be charged with the liabilities in respect of that Series and all
expenses, costs, charges and reserves attributable to that Series, and any
general liabilities, expenses, costs, charges or reserves of the Trust which
are not readily identifiable as pertaining to any particular Series shall be
allocated and charged by the Trustees to and among any one or more of the
Series established and designated from time to time in such manner and on such
basis as the Trustees in their sole discretion deem fair and equitable. The
indebtedness, expenses, costs, charges and reserves allocated and so charged
to a particular Series are herein referred to as "liabilities of" that Series.
Each allocation of liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders of all Series
for all purposes. Any creditor of any Series may look only to the assets
belonging to that Series to satisfy such creditor's debt.
(g) Dividends. Dividends and distributions on Shares of a particular
Series may be paid with such frequency as the Trustees may determine, which
may be daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Trustees may determine, to the
Shareholders of that Series, from such of the income, accrued or realized, and
capital gains, realized or unrealized, and out of the assets belonging to that
Series, as the Trustees may determine, after providing for actual and accrued
liabilities of that Series. All dividends and distributions on Shares of a
particular Series shall be distributed pro rata to the Shareholders of that
Series in proportion to the number of such Shares held by such holders at the
date and time of record established for the payment of such dividends or
distributions, except that the dividends and distributions of investment
income and capital gains with respect to each Class of Shares of a particular
Series shall be in such amount as may be declared from time to time by the
Trustees, and
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such dividends and distributions may vary as between such Classes to reflect
differing allocations of the expenses of the Series between the Shareholders
of such several Classes and any resultant differences between the net asset
value of such several Classes to such extent and for such purposes as the
Trustees may deem appropriate and further except that, in connection with any
dividend or distribution program or procedure, the Trustees may determine that
no dividend or distribution shall be payable on Shares as to which the
Shareholder's purchase order and/or payment have not been received by the time
or times established by the Trustees under such program or procedure, or that
dividends or distributions shall be payable on Shares which have been tendered
by the holder thereof for redemption or repurchase, but the redemption or
repurchase proceeds of which have not yet been paid to such Shareholder. Such
dividends and distributions may be made in cash, property or Shares of any
Class of that Series or a combination thereof as determined by the Trustees,
or pursuant to any program that the Trustees may have in effect at the time
for the election by each Shareholder of the mode of the making of such
dividend or distribution to that Shareholder. Any such dividend or
distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with subsection (l) of this Section 6.1.
(h) Liquidation. In the event of the liquidation or dissolution of the
Trust, the Shareholders of each Series of which Shares are outstanding shall
be entitled to receive, when and as declared by the Trustees, the excess of
the assets belonging to that Series over the liabilities of such Series. The
assets so distributable to the Shareholders of any particular Series shall be
distributed among such Shareholders in proportion to the number of Shares of
that Series held by them and recorded on the books of the Trust. The
liquidation of any particular Series may be authorized by vote of a Majority
of the Trustees, subject to the affirmative vote of "a majority of the
outstanding voting securities" of that Series, as the quoted phrase is defined
in the 1940 Act, determined in accordance with clause (iii) of the definition
of "Majority Shareholder Vote" in Section 1.4 hereof.
(i) Voting. The Shareholders shall have the voting rights set forth in or
determined under Article 7 hereof.
(j) Redemption by Shareholder. Each holder of Shares of a particular
Series shall have the right at such times as may be permitted by the Trust,
but no less frequently than required by the 1940 Act, to require the Series to
redeem all or any part of his Shares of that Series at a redemption price
equal to the net asset value per Share of that Series next determined in
accordance with subsection (l) of this Section 6.1 after the Shares are
properly tendered for redemption; provided, that the Trustees may from time to
time, in their discretion, determine and impose a fee for such redemption and
that the proceeds of the redemption of Shares (including a fractional Share)
of any Class of a particular Series shall be reduced by the amount of any
applicable contingent deferred sales charge or other sales charge, if any,
payable on such redemption to the distributor of Shares of such Class pursuant
to the terms of the initial issuance of the Shares of such Class (to the
extent consistent with the 1940 Act or regulations or exemptions thereunder)
and the Trust shall promptly pay to such distributor the amount of such
deferred sales charge. Payment of the redemption price shall be in cash;
provided, however, that if the Trustees determine, which determination shall
be conclusive, that conditions exist which make payment wholly in cash unwise
or undesirable, the Trust may make payment wholly or partly in Securities or
other assets belonging to such Series at the value of such Securities or
assets used in such determination of net asset value. Notwithstanding the
foregoing, the Trust may postpone payment of the redemption price and may
suspend the right of the holders of Shares of any Series to
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require the Trust to redeem Shares of that Series during any period or at any
time when and to the extent permissible under the 1940 Act.
(k) Redemption at the Option of the Trust. The Trustees shall have the
power to redeem Shares of any Series at a redemption price determined in
accordance with Section 6.1(j), if at any time (i) the total investment in
such account does not have a value of at least such minimum amount as may be
specified in the Prospectus for such Series from time to time (ii) the number
of Shares held in such account is equal to or in excess of a specified
percentage of Shares of the Trust or any Series as set forth from time to time
in the applicable Prospectus. In the event the Trustees determine to exercise
their power to redeem Shares provided in this Section 6.1(k), the Shareholder
shall be notified that the value of his account is less than the applicable
minimum amount and shall be allowed 30 days to make an appropriate investment
before redemption is processed.
(l) Net Asset Value. The net asset value per Share of any Series at any
time shall be the quotient obtained by dividing the value of the net assets of
such Series at such time (being the current value of the assets belonging to
such Series, less its then existing liabilities) by the total number of Shares
of that Series then outstanding, all determined in accordance with the methods
and procedures, including without limitation those with respect to rounding,
established by the Trustees from time to time in accordance with the
requirements of the 1940 Act. The net asset value of the several Classes of a
particular Series shall be separately computed, and may vary from one another.
The Trustees shall establish procedures for the allocation of investment
income or capital gains and expenses and liabilities of a particular Series
between the several Classes of such Series . The Trustees may determine to
maintain the net asset value per Share of any Series at a designated constant
dollar amount and in connection therewith may adopt procedures not
inconsistent with the 1940 Act for the continuing declaration of income
attributable to that Series as dividends payable in additional Shares of that
Series at the designated constant dollar amount and for the handling of any
losses attributable to that Series. Such procedures may provide that in the
event of any loss each Shareholder shall be deemed to have contributed to the
shares of beneficial interest account of that Series his pro rata portion of
the total number of Shares required to be canceled in order to permit the net
asset value per Share of that Series to be maintained, after reflecting such
loss, at the designated constant dollar amount. Each Shareholder of the Trust
shall be deemed to have expressly agreed, by his investment in any Series with
respect to which the Trustees shall have adopted any such procedure, to make
the contribution referred to in the preceding sentence in the event of any
such loss.
(m) Transfer. All Shares of each particular Series shall be transferable,
but transfers of Shares of a particular Series will be recorded on the Share
transfer records of the Trust applicable to that Series only at such times as
Shareholders shall have the right to require the Trust to redeem Shares of
that Series and at such other times as may be permitted by the Trustees.
(n) Equality. All Shares of each particular Series shall represent an
equal proportionate interest in the assets belonging to that Series (subject
to the liabilities of that Series), and each Share of any particular Series
shall be equal to each other Share thereof; but the provisions of this
sentence shall not restrict any distinctions between the several Classes of a
Series permissible under this Section 6.1 or under Section 7. 1 hereof nor any
distinctions permissible under subsection (g) of this Section 6.1 that may
exist with respect to dividends and distributions on Shares of the same
Series. The Trustees may from time to time divide or combine the Shares of any
class of particular Series into a greater or lesser number of Shares of that
class of a Series without thereby changing the proportionate beneficial
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interest in the assets belonging to that Series or in any way affecting the
rights of the holders of Shares of any other Series.
(o) Rights of Fractional Shares. Any fractional Share of any Series shall
carry proportionately all the rights and obligations of a whole Share of that
Series, including rights and obligations with respect to voting, receipt of
dividends and distributions, redemption of Shares, and liquidation of the
Trust or of the Series to which they pertain.
(p) Conversion Rights. (i) Subject to compliance with the requirements
of the 1940 Act, the Trustees shall have the authority to provide that holders
of Shares of any Series shall have the right to convert said Shares into
Shares of one or more other Series, that holders of any Class of a Series of
Shares shall have the right to convert said Shares of such Class into Shares
of one or more other Classes of such Series, and that Shares of any Class of a
Series shall be automatically converted into Shares of another Class of such
Series, in each case in accordance with such requirements and procedures as
the Trustees may establish.
(ii) The number of Shares of into which a convertible Share shall
convert shall equal the number (including for this purpose fractions of a
Share) obtained by dividing the net asset value per Share for purposes of sales
and redemptions of the converting Share on the Conversion Date by the net asset
value per Share for purposes of sales and redemptions of the Class of Shares
into which it is converting on the Conversion Date.
(iii) On the Conversion Date, the Share converting into another share
will cease to accrue dividends and will no longer be deemed outstanding and the
rights of the holders thereof (except the right to receive the number of target
Shares into which the converting Shares have been converted and declared but
unpaid dividends to the Conversion Date) will cease. Certificates representing
Shares resulting from the conversion need not be issued until certificates
representing Shares converted, if issued, have been received by the Trust or
its agent duly endorsed for transfer.
(vi) The Trust will appropriately reflect the conversion of Shares of
one Class of a Series into Shares of another Class of such Series on the first
periodic statements of account sent to Shareholders of record affected which
provide account information with respect to a reporting period which includes
the date such conversion occurred.
SECTION 6.2. Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or of a Transfer Agent or similar agent for
the Trust, which books shall be maintained separately for the Shares of each
Series that has been authorized. Certificates evidencing the ownership of
Shares need not be issued except as the Trustees may otherwise determine from
time to time, and the Trustees shall have power to call outstanding Share
certificates and to replace them with book entries. The Trustees may make such
rules as they consider appropriate for the issuance of Share certificates, the
use of facsimile signatures, the transfer of Shares and similar matters. The
record books of the Trust as kept by the Trust or any Transfer Agent or similar
agent, as the case may be, shall be conclusive as to who are the Shareholders
and as to the number of Shares of each Series held from time to time by each
such Shareholder.
The holders of Shares of each Series shall upon demand disclose to the
Trustees in writing such information with respect to their direct and indirect
ownership of Shares of such Series as the Trustees
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deem necessary to comply with the provisions of the Internal Revenue Code, or
to comply with the requirements of any other authority.
SECTION 6.3. Investments in the Trust. The Trustees may accept investments
in any Series of the Trust from such Persons and on such terms and for such
consideration, not inconsistent with the provisions of the 1940 Act, as they
from time to time authorize. The Trustees may authorize any Distributor,
Principal Underwriter, Custodian, Transfer Agent or other Person to accept
orders for the purchase of Shares that conform to such authorized terms and to
reject any purchase orders for Shares, whether or not conforming to such
authorized terms.
SECTION 6.4. No Preemptive Rights. No Shareholder, by virtue of holding
Shares of any Series, shall have any preemptive or other right to subscribe to
any additional Shares of that Series, or to any shares of any other Series, or
any other Securities issued by the Trust.
SECTION 6.5. Status of Shares. Every Shareholder, by virtue of having
become a Shareholder, shall be held to have expressly assented and agreed to
the terms hereof and to have become a party hereto. Shares shall be deemed to
be personal property, giving only the rights provided herein. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust Property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders partners. The death of a Shareholder during the continuance of the
Trust shall not operate to terminate the Trust or any Series, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Declaration of Trust.
ARTICLE 7
SHAREHOLDERS' VOTING POWERS AND MEETINGS
SECTION 7.1. Voting Powers. The Shareholders shall have power to vote only
(i) for the election or removal of Trustees as provided in Sections 4.1(c) and
(e) hereof, (ii) with respect to the approval or termination in accordance with
the 1940 Act of any contract with a Contracting Party as provided in Section
5.2 hereof as to which Shareholder approval is required by the 1940 Act, (iii)
with respect to any termination or reorganization of the Trust or any Series to
the extent and as provided in Sections 9.2, 9.3 and 9.4 hereof, (iv) with
respect to any amendment of this Declaration of Trust to the extent and as
provided in Section 9.5 hereof, (v) to the same extent as the stockholders of a
Delaware business corporation as to whether or not a court action, proceeding
or claim should or should not be brought or maintained derivatively or as a
class action on behalf of the Trust or any Series, or the Shareholders of any
of them (provided. however, that a Shareholder of a particular Series shall not
in any event be entitled to maintain a derivative or class action on behalf of
any other Series or the Shareholders thereof), and (vi) with respect to such
additional matters relating to the Trust as may be required by the 1940 Act,
this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any State, or as the Trustees may
consider necessary or desirable. If and to the extent that the Trustees shall
determine that such action is required by law or by this Declaration, they
shall cause each matter required or permitted to be voted upon at a meeting or
by written consent of Shareholders to be submitted to a separate vote of the
outstanding Shares of each Series entitled to vote thereon; provided, that (i)
when expressly required by the 1940 Act or by other law, actions of
Shareholders shall be taken by Single Class Voting of all outstanding Shares
whose holders are entitled
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to vote thereon; and (ii) when the Trustees determine that any matter to be
submitted to a vote of Shareholders affects only the rights or interests of
Shareholders of one or more but not all Series or of one or more but not all
Classes of a single Series (including without limitation any distribution plan
pursuant to Rule 12b-1 of the 1940 Act applicable to such Class), then only the
Shareholders of the Series or Classes so affected shall be entitled to vote
thereon. Any matter required to be submitted to shareholders and affecting one
or more Series shall require separate approval by the required vote of
Shareholders of each affected Series; provided, however, that to the extent
required by the 1940 Act, there shall be no separate Series votes on the
election or removal of Trustees, the selection of auditors for the Trust and
its Series or approval of any agreement or contract entered into by the Trust
or any Series. Shareholders of a particular Series shall not be entitled to
vote on any matter that affects only one or more other Series.
SECTION 7.2. Number of Votes and Manner of Voting: Proxies. On each matter
submitted to a vote of the Shareholders, each holder of Shares of any Series
shall be entitled to a number of votes equal to the number of Shares of such
Series standing in his name on the books of the Trust. There shall be no
cumulative voting in the election or removal of Trustees. Shares may be voted
in person or by proxy. A proxy with respect to Shares held in the name of two
(2) or more Persons shall be valid if executed by any one of them unless at or
prior to exercise of the proxy the Trust receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a Shareholder shall be deemed valid unless challenged at or prior to
its exercise and the burden of proving invalidity shall rest on the challenger.
Until Shares are issued, the Trustees may exercise all rights of Shareholders
and may take any action required by law, this Declaration of Trust or the
By-Laws to be taken by Shareholders.
SECTION 7.3. Meetings. Meetings of Shareholders may be called by the
Trustees from time to time for the purpose of taking action upon any matter
requiring the vote or authority of the Shareholders as herein provided, or upon
any other matter deemed by the Trustees to be necessary or desirable. Written
notice of any meeting of Shareholders shall be given or caused to be given by
the Trustees by mailing such notice at least seven (7) days before such
meeting, postage prepaid, stating the time, place and purpose of the meeting,
to each Shareholder at the Shareholder's address as it appears on the records
of the Trust. The Trustees shall promptly call and give notice of a meeting of
Shareholders for the purpose of voting upon removal of any Trustee of the Trust
when requested to do so in writing by Shareholders holding not less than ten
percent (10%) of the Shares then outstanding. If the Trustees shall fail to
call or give notice of any meeting of Shareholders for a period of thirty (30)
days after written application by Shareholders holding at least ten percent
(10%) of the Shares then outstanding requesting that a meeting be called for
any other purpose requiring action by the Shareholders as provided herein or in
the By-Laws, then Shareholders holding at least ten percent (10%) of the Shares
then outstanding may call and give notice of such meeting, and thereupon the
meeting shall be held in the manner provided for herein in case of call thereof
by the Trustees. Any meetings may be held within or without The State of
Delaware. Shareholders may only act with respect to matters set forth in the
notice to Shareholders.
SECTION 7.4. Record Dates. For the purpose of determining the Shareholders
who are entitled to vote or act at any meeting or any adjournment thereof, or
who are entitled to participate in any dividend or distribution, or for the
purpose of any other action, the Trustees may from time to time close the
transfer books for such period, not exceeding thirty (30) days (except at or in
connection with the termination of the Trust), as the Trustees may determine;
or without closing the transfer books the Trustees may fix a date and time not
more than ninety (90) days prior to the date of any meeting of
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<PAGE> 31
Shareholders or other action as the date and time of record for the
determination of Shareholders entitled to vote at such meeting or any
adjournment thereof or to be treated as Shareholders of record for purposes of
such other action, and any Shareholder who was a Shareholder at the date and
time so fixed shall be entitled to vote at such meeting or any adjournment
thereof or to be treated as a Shareholder of record for purposes of such other
action, even though he has since that date and time disposed of his Shares, and
no Shareholder becoming such after that date and time shall be so entitled to
vote at such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action.
SECTION 7.5. Quorum and Required Vote. A majority of the Shares entitled
to vote shall be a quorum for the transaction of business at a Shareholders'
meeting, but any lesser number shall be sufficient for adjournments. Any
adjourned session or sessions may be held within a reasonable time after the
date set for the original meeting without the necessity of further notice. A
Majority Shareholder Vote at a meeting of which a quorum is present shall
decide any question, except when a different vote is required or permitted by
any provision of the 1940 Act or other applicable law or by this Declaration of
Trust or the By-Laws, or when the Trustees shall in their discretion require a
larger vote or the vote of a majority or larger fraction of the Shares of one
or more particular Series.
SECTION 7.6. Action By Written Consent. Subject to the provisions of the
1940 Act and other applicable law, any action taken by Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
matter (or such larger proportion thereof or of the Shares of any particular
Series as shall be required by the 1940 Act or by any express provision of this
Declaration of Trust or the By-Laws or as shall be permitted by the Trustees)
consent to the action in writing and if the writings in which such consent is
given are filed with the records of the meetings of Shareholders, to the same
extent and for the same period as proxies given in connection with a
Shareholders' meeting. Such consent shall be treated for all purposes as a vote
taken at a meeting of Shareholders.
SECTION 7.7. Inspection of Records. The records of the Trust shall be open
to inspection by Shareholders to the same extent as is permitted stockholders
of a Delaware business corporation under the Delaware business corporation law.
SECTION 7.8. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters not
inconsistent with the provisions hereof.
ARTICLE 8
LIMITATION OF LIABILITY: INDEMNIFICATION
SECTION 8.1. Trustees. Shareholders. etc. Not Personally Liable; Notice.
The Trustees, officers, employees and agents of the Trust, in incurring any
debts, liabilities or obligations, or in limiting or omitting any other actions
for or in connection with the Trust, are or shall be deemed to be acting as
Trustees, officers, employees or agents of the Trust and not in their own
capacities. No Shareholder shall be subject to any personal liability
whatsoever in tort, contract or otherwise to any other Person or Persons in
connection with the assets or the affairs of the Trust or of any Series, and
subject to Section 8.4 hereof, no Trustee, officer, employee or agent of the
Trust shall be subject to any personal liability whatsoever in tort, contract,
or otherwise, to any other Person or Persons in connection with the assets or
affairs of the Trust or of any Series, save only that arising from his own
willful misfeasance, bad faith,
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<PAGE> 32
gross negligence or reckless disregard of the duties involved in the conduct of
his office or the discharge of his functions. The Trust (or if the matter
relates only to a particular Series, that Series) shall be solely liable for
any and all debts, claims, demands, judgments, decrees, liabilities or
obligations of any and every kind, against or with respect to the Trust or such
Series in tort, contract or otherwise in connection with the assets or the
affairs of the Trust or such Series, and all Persons dealing with the Trust or
any Series shall be deemed to have agreed that resort shall be had solely to
the Trust Property of the Trust or the Series Assets of such Series, as the
case may be, for the payment or performance thereof.
The Trustees shall use their best efforts to ensure that every note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officers or officer shall give notice that a Certificate of Trust,
referring to the Declaration of Trust, is on file with the Secretary of the
state of Delaware and shall recite to the effect that the same was executed or
made by or on behalf of the Trust or by them as Trustees or Trustee or as
officers or officer, and not individually, and that the obligations of such
instrument are not binding upon any of them or the Shareholders individually
but are binding only upon the assets and property of the Trust, or the
particular Series in question, as the case may be, but the omission thereof
shall not operate to bind any Trustees or Trustee or officers or officer or
Shareholders or Shareholder individually, or to subject the Series Assets of
any Series to the obligations of any other Series.
SECTION 8.2. Trustees' Good Faith Action; Expert Advice: No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. Subject to Section 8.4 hereof, a
Trustee shall be liable for his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
office of Trustee, and for nothing else, and shall not be liable for errors of
judgment or mistakes of fact or law. Subject to the foregoing, (i) the Trustees
shall not be responsible or liable in any event for any neglect or wrongdoing
of any officer, agent, employee, consultant, Investment Adviser, Administrator,
Distributor or Principal Underwriter, Custodian or Transfer Agent, Dividend
Disbursing Agent, Shareholder Servicing Agent or Accounting Agent of the Trust,
nor shall any Trustee be responsible for the act or omission of any other
Trustee; (ii) the Trustees may take advice of counsel or other experts with
respect to the meaning and operation of this Declaration of Trust and their
duties as Trustees, and shall be under no liability for any act or omission in
accordance with such advice or for failing to follow such advice; and (iii) in
discharging their duties, the Trustees, when acting in good faith, shall be
entitled to rely upon the books of account of the Trust and upon written
reports made to the Trustees by any officer appointed by them, any independent
public accountant, and (with respect to the subject matter of the contract
involved) any officer, partner or responsible employee of a Contracting Party
appointed by the Trustees pursuant to Section 5.2 hereof. The Trustees as such
shall not be required to give any bond or surety or any other security for the
performance of their duties.
SECTION 8.3. Indemnification of Shareholders. If any Shareholder (or
former Shareholder) of the Trust shall be charged or held to be personally
liable for any obligation or liability of the Trust solely by reason of being
or having been a Shareholder and not because of such Shareholder's acts or
omissions or for some other reason, the Trust (upon proper and timely request
by the Shareholder) may assume the defense against such charge and satisfy any
judgment thereon or may reimburse the Shareholders for expenses, and the
Shareholder or former Shareholder (or the heirs, executors, administrators or
other legal representatives thereof, or in the case of a corporation or other
entity, its corporate or other general successor) shall be entitled (but solely
out of the assets of the Series of which such Shareholder or
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<PAGE> 33
former Shareholder is or was the holder of Shares) to be held harmless from and
indemnified against all loss and expense arising from such liability.
SECTION 8.4. Indemnification of Trustees. Officers, etc. Subject to the
limitations, if applicable, hereinafter set forth in this Section 8.4, the
Trust shall indemnify (from the assets of the Series or Series to which the
conduct in question relates) each of its Trustees, officers, employees and
agents (including Persons who serve at the Trust's request as directors,
officers or trustees of another organization in which the Trust has any
interest as a shareholder, creditor or otherwise (hereinafter, together with
such Person's heirs, executors, administrators or personal representative,
referred to as a "Covered Person")) against all liabilities, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and expenses, including reasonable accountants' and counsel
fees, incurred by any Covered Person in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or otherwise or with which
such Covered Person may be or may have been threatened, while in office or
thereafter, by reason of being or having been such a Trustee or officer,
director or trustee, except with respect to any matter as to which it has been
determined that such Covered Person (i) did not act in good faith in the
reasonable belief that such Covered Person's action was in or not opposed to
the best interests of the Trust; (ii) had acted with willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office (iii) for a criminal proceeding, had
reasonable cause to believe that his conduct was unlawful (the conduct
described in (i), (ii) and (iii) being referred to hereafter as "Disabling
Conduct"). A determination that the Covered Person is entitled to
indemnification may be made by (i) a final decision on the merits by a court or
other body before whom the proceeding was brought that the Covered Person to be
indemnified was not liable by reason of Disabling Conduct, (ii) dismissal of a
court action or an administrative proceeding against a Covered Person for
insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable by reason of Disabling Conduct by (a) a vote of a majority of a quorum
of Trustees who are neither "interested persons" of the Trust as defined in
Section 2(a)(19) of the 1940 Act nor parties to the proceeding (the
"Disinterested Trustees"), or (b) an independent legal counsel in a written
opinion. Expenses, including accountants' and counsel fees so incurred by any
such Covered Person (but excluding amounts paid in satisfaction of judgments,
in compromise or as fines or penalties), may be paid from time to time by one
or more Series to which the conduct in question related in advance of the final
disposition of any such action, suit or proceeding; provided that the Covered
Person shall have undertaken to repay the amounts so paid to such Series if it
is ultimately determined that indemnification of such expenses is not
authorized under this Article 8 and (i) the Covered Person shall have provided
security for such undertaking, (ii) the Trust shall be insured against losses
arising by reason of any lawful advances, or (iii) a majority of a quorum of
the disinterested Trustees, or an independent legal counsel in a written
opinion, shall have determined, based on a review of readily available facts
(as opposed to a full trial type inquiry), that there is reason to believe that
the Covered Person ultimately will be found entitled to indemnification.
SECTION 8.5. Compromise Payment. As to any matter disposed of by a
compromise payment by any such Covered Person referred to in Section 8.4
hereof, pursuant to a consent decree or otherwise, no such indemnification
either for said payment or for any other expenses shall be provided unless such
indemnification shall be approved (i) by a majority of a quorum of the
disinterested Trustees or (ii) by an independent legal counsel in a written
opinion. Approval by the Trustees pursuant to clause (i) or by independent
legal counsel pursuant to clause (ii) shall not prevent the recovery from any
Covered
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<PAGE> 34
Person of any amount paid to such Covered Person in accordance with either of
such clauses as indemnification if such Covered Person is subsequently
adjudicated by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that such Covered Person's action was in or not
opposed to the best interests of the Trust or to have been liable to the Trust
or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of the
Covered Person's office.
SECTION 8.6. Indemnification Not Exclusive, etc. The right of
indemnification provided by this Article 8 shall not be exclusive of or affect
any other rights to which any such Covered Person or shareholder may be
entitled. As used in this Article 8, a "disinterested" Person is one against
whom none of the actions, suits or other proceedings in question, and no other
action, suit or other proceeding on the same or similar grounds is then or has
been pending or threatened. Nothing contained in this Article 8 shall affect
any rights to indemnification to which personnel of the Trust, other than
Trustees and officers, and other Persons may be entitled by contract or
otherwise under law, nor the power of the Trust to purchase and maintain
liability insurance on behalf of any such Person.
SECTION 8.7. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
ARTICLE 9
DURATION: REORGANIZATION: INCORPORATION; AMENDMENTS
SECTION 9.1. Duration of Trust. Unless terminated as provided herein, the
Trust shall have perpetual existence.
SECTION 9.2. Termination of Trust. The Trust may be terminated at any time
by a Majority of the Trustees, subject to the favorable vote of the holders of
not less than a majority of the Shares outstanding and entitled to vote of each
Series of the Trust, or by an instrument or instruments in writing without a
meeting, consented to by the holders of not less than a majority of such
Shares, or by such greater or different vote of Shareholders of any Series as
may be established by the Certificate of Designation by which such Series was
authorized. Upon termination, after paying or otherwise providing for all
charges, taxes, expenses and liabilities, whether due or accrued or anticipated
as may be determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining assets to
distributable form in cash, Securities or other property, or any combination
thereof, and distribute the proceeds to the Shareholders, in conformity with
the provisions of Section 6.1(h) hereof. After termination of the Trust or any
Series and distribution to the Shareholders as herein provided, a majority of
the Trustees shall execute and lodge among the records of the Trust an
instrument in writing setting forth the fact of such termination. Upon
termination of the Trust, the Trustees shall thereupon, be discharged from all
further liabilities and duties hereunder, and the rights and interests of all
Shareholders shall thereupon cease. Upon termination of any Series, the
Trustees shall thereupon be discharged from all further liabilities and duties
with respect to such Series, and the rights and interests of all Shareholders
of such Series shall thereupon cease.
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SECTION 9.3. Reorganization. The Trustees may sell, convey and transfer
all or substantially all of the assets of the Trust, or the assets belonging to
any one or more Series, to another trust, partnership, association, corporation
or other entity organized under the laws of any state of the United States, or
may transfer such assets to another Series of the Trust, in exchange for cash,
Shares or other Securities (including, in the case of a transfer to another
Series of the Trust, Shares of such other Series), or to the extent permitted
by law then in effect may merge or consolidate the Trust or any Series with any
other Trust or any corporation, partnership, or association organized under the
laws of any state of the United States, all upon such terms and conditions and
for such consideration when and as authorized by vote or written consent of a
Majority of the Trustees and approved by the affirmative vote of the holders of
not less than a majority of the Shares outstanding and entitled to vote of each
Series whose assets are affected by such transaction, or by an instrument or
instruments in writing without a meeting, consented to by the holders of not
less than a majority of such Shares, and/or by such other vote of any Series as
may be established by the Certificate of Designation with respect to such
Series. Following such transfer, the Trustees shall distribute the cash, Shares
or other Securities or other consideration received in such transaction (giving
due effect to the assets belonging to and indebtedness of, and any other
differences among, the various Series of which the assets have so been
transferred) among the Shareholders of the Series of which the assets have been
so transferred; and if all of the assets of the Trust have been so transferred,
the Trust shall be terminated. Nothing in this Section 9.3 shall be construed
as requiring approval of Shareholders for the Trustees to organize or assist in
organizing one or more corporations, trusts, partnerships, associations or
other organizations, and to sell, convey or transfer less than substantially
all of the Trust Property or the assets belonging to any Series to such
organizations or entities.
SECTION 9.4. Incorporation. Upon approval by Majority Shareholder Vote,
the Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction or any other trust,
partnership, association or other organization to take over all of the Trust
Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, association or organization, in
exchange for the shares or securities thereof, or otherwise, and to lend money
to, subscribe for the shares of securities of, and enter into any contracts
with any such corporation, trust, partnership, association or organization in
which the Trust holds or is about to acquire shares or any other interests. The
Trustees may also cause a merger or consolidation between the Trust or any
successor thereto and any such corporation, trust, partnership, association or
other organization if and to the extent permitted by law, as provided under the
law then in effect. Nothing contained herein shall be construed as requiring
approval of Shareholders for the Trustees to organize or assist in organizing
one or more corporation, trusts, partnerships, associations or other
organizations and selling, conveying or transferring a portion of the Trust
Property to such organizations or entities.
SECTION 9.5. Amendments; etc. All rights granted to the Shareholders under
this Declaration of Trust are granted subject to the reservation of the right
to amend this Declaration of Trust as herein provided, except that no amendment
shall repeal the limitations on personal liability of any Shareholder or
Trustee or the prohibition of assessment upon the Shareholders (otherwise than
as permitted under Section 6.1(l)) without the express consent of each
Shareholder or Trustee involved. Subject to the foregoing, the provisions of
this Declaration of Trust (whether or not related to the rights of
Shareholders) may be amended at any time, so long as such amendment does not
adversely affect the rights of any Shareholder with respect to which such
amendment is or purports to be applicable and so long as such amendment is not
in contravention of applicable law, including the 1940 Act, by an instrument in
writing
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signed by a Majority of the Trustees (or by an officer of the Trust pursuant to
the vote of a Majority of the Trustees). Any amendment to this Declaration of
Trust that adversely affects the rights of all Shareholders may be adopted at
any time by an instrument in writing signed by a Majority of the Trustees (or
by an officer of the Trust pursuant to a vote of a Majority of the Trustees)
when authorized to do so by the vote in accordance with Section 7.1 hereof of
Shareholders holding a majority of all the Shares outstanding and entitled to
vote, without regard to Series, or if said amendment adversely affects the
rights of the Shareholders of less than all of the Series, by the vote of the
holders of a majority of all the Shares entitled to vote of each Series so
affected.
SECTION 9.6. Filing of Copies of Declaration and Amendments. The original
or a copy of this Declaration and of each amendment hereto (including each
Certificate of Designation and Certificate of Termination) shall be kept at the
office of the Trust where it may be inspected by any Shareholder. A restated
Declaration, integrating into a single instrument all of the provisions of this
Declaration which are then in effect and operative, may be executed from time
to time by a Majority of the Trustees and shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter be referred to
in lieu of the original Declaration and the various amendments thereto. A
Certificate of Trust shall be filed in the office of the Secretary of State of
the State of Delaware.
ARTICLE 10
MISCELLANEOUS
SECTION 10.1. Notices. Any and all notices to which any Shareholder
hereunder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the applicable register of the
Trust.
SECTION 10.2. Governing Law. This Declaration of Trust is, with reference
to the laws thereof, and the rights of all parties and the construction and
effect of every provision hereof shall be, subject to and construed according
to the laws of said The State of Delaware.
SECTION 10.3. Counterparts. This Declaration of Trust and any amendment
thereto may be simultaneously executed in several counterparts, each of which
so executed shall be deemed to be an original, and such counterparts, together,
shall constitute but one and the same instrument, which shall be sufficiently
evidenced by any such original counterpart.
SECTION 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust is a Trustee hereunder,
certifying to: (a) the number or identity of Trustees or Shareholders, (b) the
due authorization of the execution of any instrument or writing, (c) the form
of any vote passed at a meeting of Trustees or Shareholders, (d) the fact that
the number of Trustees or Shareholders present at any meeting or executing any
written instrument satisfies the requirements of this Declaration of Trust, (e)
the form of any By-Law adopted, or the identity of any officers elected, by the
Trustees, (f) the existence or nonexistence of any fact or facts which in any
manner relate to the affairs of the Trust, or (g) the name of the Trust or the
establishment of a Series shall be conclusive evidence as to the matters so
certified in favor of any Person dealing with the Trustees, or any of them, and
the successors of such Person.
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SECTION 10.5. References; Headings. The masculine gender shall include the
feminine and neuter genders. Headings are placed herein for convenience of
reference only and shall not be taken as a part of this Declaration or control
or affect the meaning, construction or effect hereof.
SECTION 10.6. Provisions in Conflict With Law or Regulation. (a) The
provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and regulations,
the conflicting provision shall be deemed never to have constituted a part of
this Declaration; provided, however, that such determination shall not affect
any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
SECTION 10.7. Use of the Name "Van Kampen American Capital". Van Kampen
American Capital, Inc. ("Van Kampen American Capital") has consented to the use
by the Trust and by each Series and each Series thereof to the identifying
words "Van Kampen" or "Van Kampen Merritt" or any combination thereof in the
name of the Trust and of each Series and Series thereof. Such consent is
conditioned upon the Trust's employment of Van Kampen American Capital, its
successors or a subsidiary or affiliate thereof as investment adviser to the
Trust and to each Series and each Series thereof. As between Van Kampen
American Capital and the Trust, Van Kampen American Capital shall control the
use of such name insofar as such name contains the identifying words "Van
Kampen" or "Van Kampen Merritt". Van Kampen American Capital may from time to
time use the identifying words "American Capital," "Van Kampen" or "Van Kampen
Merritt" in other connections and for other purposes, including without
limitation in the names of other investment companies, corporations or
businesses that it may manage, advise, sponsor or own or in which it may have a
financial interest. Van Kampen American Capital may require the Trust or any
Series or Series thereof to cease using the identifying words "Van Kampen" or
"Van Kampen Merritt" in the name of the Trust or any Series or any Series
thereof if the Trust or any Series or Series thereof ceases to employ Van
Kampen American Capital, its successors or a subsidiary or affiliate thereof as
investment adviser.
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IN WITNESS WHEREOF, the undersigned, being the initial Trustee, has set
his hand and seal, for himself and his assigns, unto this Declaration of Trust
of Van Kampen American Capital Tax Free Trust, all as of the day and year
first above written.
/s/ Ronald A. Nyberg
- ------------------------------
Initial Trustee
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A C K N O W L E D G M E N T
STATE OF ILLINOIS )
) ss
COUNTY OF DUPAGE )
May 10, 1995
Then personally appeared the above named Ronald A. Nyberg and acknowledged
the foregoing instrument to be his free act and deed.
Before me,
/s/ Virginia Rodriguez
---------------------------------
(Notary Public)
My commission expires: 1/13/99
33
<PAGE> 1
EXHIBIT (1)(b)(i)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Insured Tax Free Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Insured Tax Free Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund.
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
---------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(ii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Tax Free High Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Tax Free High Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund.
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
---------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(iii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital California Insured Tax Free Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital California Insured Tax Free Fund
(the "Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund.
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
---------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(iv)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Municipal Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Municipal Income Fund (the "Fund")
with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(v)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Limited Term Municipal Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Limited Term Municipal Income Fund
(the "Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(vi)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Florida Insured Tax Free Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Florida Insured Tax Free Income
Fund (the "Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(vii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital New Jersey Tax Free Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital New Jersey Tax Free Income Fund
(the "Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(b)(viii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital New York Tax Free Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital New York Tax Free Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund.
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
/s/ Ronald A. Nyberg
------------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (2)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
BYLAWS
<PAGE> 2
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
BYLAWS
INDEX
<TABLE>
<S> <C>
ARTICLE 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS ......................................... 1
Section 1.1. Meetings .............................................................. 1
Section 1.2. Presiding Officer; Secretary .......................................... 1
Section 1.3. Authority of Chairman of Meeting to Interpret Declaration and Bylaws .. 1
Section 1.4. Voting; Quorum ........................................................ 1
Section 1.5. Inspectors ............................................................ 1
Section 1.6 Records at Shareholder Meetings ....................................... 1
Section 1.7. Shareholders Action in Writing ........................................ 2
ARTICLE 2 TRUSTEES AND TRUSTEES' MEETINGS .......................................... 2
Section 2.1. Number of Trustees .................................................... 2
Section 2.2. Regular Meetings of Trustees .......................................... 2
Section 2.3. Special Meetings of Trustees .......................................... 2
Section 2.4. Notice of Meetings .................................................... 2
Section 2.5. Quorum; Presiding Trustee ............................................. 2
Section 2.6. Participation by Telephone ............................................ 2
Section 2.7. Location of Meetings .................................................. 2
Section 2.8. Actions by Trustees ................................................... 2
Section 2.9. Rulings of Presiding Trustee .......................................... 3
Section 2.10. Trustees' Action in Writing ........................................... 3
Section 2.11. Resignations .......................................................... 3
Section 2.12. Tenure of Trustees .................................................... 3
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 3 OFFICERS ........................................................................ 3
Section 3.1. Officers of the Trust ................................................. 3
Section 3.2. Time and Terms of Election ............................................ 3
Section 3.3. Resignation and Removal ............................................... 3
Section 3.4. Fidelity Bond ......................................................... 3
Section 3.5. President ............................................................. 3
Section 3.6. Vice Presidents ....................................................... 3
Section 3.7. Treasurer and Assistant Treasurers .................................... 3
Section 3.8. Controller and Assistant Controllers .................................. 4
Section 3.9. Secretary and Assistant Secretaries ................................... 4
Section 3.10. Substitutions ......................................................... 4
Section 3.11. Execution of Deeds, etc. .............................................. 4
Section 3.12. Power to Vote Securities .............................................. 4
ARTICLE 4 COMMITTEES ...................................................................... 4
Section 4.1. Power of Trustees to Designate Committees ............................. 4
Section 4.2. Rules for Conduct of Committee Affairs ................................ 5
Section 4.3. Trustees May Alter, Abolish, etc., Committees ......................... 5
Section 4.4. Minutes; Review by Trustees ........................................... 5
ARTICLE 5 SEAL ............................................................................ 6
ARTICLE 6 SHARES .......................................... ............................... 6
Section 6.1. Issuance of Shares .................................................... 6
Section 6.2. Uncertificated Shares ................................................. 6
Section 6.3. Share Certificates .................................................... 6
Section 6.4. Lost, Stolen, etc., Certificates ...................................... 6
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE 7 STOCK TRANSFERS ................................................................. 6
Section 7.1. Transfer Agents, Registrars, etc. ..................................... 6
Section 7.2. Transfer of Shares .................................................... 6
Section 7.3. Registered Shareholders ............................................... 7
ARTICLE 8 AMENDMENTS ...................................................................... 7
Section 8.1. Bylaws Subject to Amendment ........................................... 7
Section 8.2. Notice of Proposal to Amend Bylaws Required ........................... 7
</TABLE>
<PAGE> 5
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
BYLAWS
These are the Bylaws of Van Kampen American Capital Tax Free Trust, a
trust with transferable shares established under the laws of The State of
Delaware (the "Trust"), pursuant to an Agreement and Declaration of Trust of
the Trust (the "Declaration") made the 10th day of May, 1995, and a Certificate
of Trust filed in the office of the Secretary of State pursuant to Section 3810
of The Delaware Business Trust Act, Title 12, Chapter 38 of the Delaware Code.
These Bylaws have been adopted by the Trustees pursuant to the authority
granted by Section 4.14 of the Declaration.
All words and terms capitalized in these Bylaws, unless otherwise
defined herein, shall have the same meanings as they have in the Declaration.
ARTICLE 1
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
SECTION 1.1. Meetings. A meeting of the Shareholders of the Trust shall
be held whenever called by the Chairman, the President or a majority of the
Trustees and whenever election of a Trustee or Trustees by Shareholders is
required by the provisions of the 1940 Act. Meetings of Shareholders shall
also be called by the Trustees when requested in writing by Shareholders
holding at least ten percent (10%) of the Shares then outstanding for the
purpose of voting upon removal of any Trustee, or if the Trustees shall fail to
call or give notice of any such meeting of Shareholders for a period of thirty
(30) days after such application, then Shareholders holding at least ten
percent (10%) of the Shares then outstanding may call and give notice of such
meeting. Notice of Shareholders' meetings shall be given as provided in the
Declaration.
SECTION 1.2. Presiding Officer; Secretary. The President shall preside
at each Shareholders' meeting as chairman of the meeting, or in the absence of
the President, the Trustees present at the meeting shall elect one of their
number as chairman of the meeting. Unless otherwise provided for by the
Trustees, the Secretary of the Trust shall be the secretary of all meetings of
Shareholders and shall record the minutes thereof.
SECTION 1.3. Authority of Chairman of Meeting to Interpret_Declaration
and Bylaws. At any Shareholders' meeting the chairman of the meeting shall be
empowered to determine the construction or interpretation of the Declaration or
these Bylaws, or any part thereof or hereof, and his ruling shall be final.
SECTION 1.4. Voting; Quorum. At each meeting of Shareholders, except as
otherwise provided by the Declaration, every holder of record of Shares
entitled to vote shall be entitled to a number of votes equal to the number of
Shares standing in his name on the Share register of the Trust on the record
date of the meeting. Shareholders may vote by proxy and the form of any such
proxy may be prescribed from time to time by the Trustees. A quorum shall
exist if the holders of a majority of the outstanding Shares of the Trust
entitled to vote are present in person or by proxy, but any lesser number
shall be sufficient for adjournments. At all meetings of the Shareholders,
votes shall be taken by ballot for all matters which may be binding upon the
Trustees pursuant to Section 7.1 of the Declaration. On other matters, votes
of Shareholders need not be taken by ballot unless otherwise provided for by
the Declaration or by vote of the Trustees, or as required by the 1940 Act,
but the chairman of the meeting may in his discretion authorize any matter to
be voted upon by ballot.
SECTION 1.5. Inspectors. At any meeting of Shareholders, the chairman of
the meeting may appoint one or more Inspectors of Election or Balloting to
supervise the voting at such meeting or any adjournment thereof. If Inspectors
are not so appointed, the chairman of the meeting may, and on the request of
any Shareholder present or represented and entitled to vote shall, appoint one
or more Inspectors for such purpose. Each Inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of Inspector of Election or Balloting, as the case may be, at such
meeting with strict impartiality and according to the best of his
ability. If appointed, Inspectors shall take charge of the polls and, when the
vote is completed, shall make a certificate of the result of the vote taken and
of such other facts as may be required by law.
SECTION 1.6. Records at Shareholder Meetings. At each meeting of the
Shareholders there shall be open for inspection the minutes of the last
previous Meeting of Shareholders of the Trust and a list of the Shareholders of
the Trust, certified to be true and correct by the
1
<PAGE> 6
Secretary or other proper agent of the Trust, as of the record date of the
meeting or the date of closing of transfer books, as the case may be. Such
list of Shareholders shall contain the name of each Shareholder. Shareholders
shall have such other rights and procedures of inspection of the books and
records of the Trust as are granted to shareholders of a Delaware corporation.
SECTION 1.7. Shareholders' Action in Writing. Nothing in this Article 1
shall limit the power of the Shareholders to take any action by means of
written instruments without a meeting, as permitted by Section 7.6 of the
Declaration.
ARTICLE 2
TRUSTEES AND TRUSTEES' MEETINGS
SECTION 2.1. Number of Trustees. There shall initially be one (1)
Trustee, and the number of Trustees shall thereafter be such number, authorized
by the Declaration, as from time to time shall be fixed by a vote adopted by a
Majority of the Trustees.
SECTION 2.2. Regular Meetings of Trustees. Regular meetings of the
Trustees may be held without call or notice at such places and at such times as
the Trustees may from time to time determine; provided, that notice of such
determination, and of the time and place of the first regular meeting
thereafter, shall be given to each absent Trustee in accordance with Section
2.4 hereof.
SECTION 2.3. Special Meetings of Trustees. Special meetings of the
Trustees may be held at any time and at any place when called by the President
or the Treasurer or by three (3) or more Trustees, or if there shall be less
than three (3) Trustees, by any Trustee; provided, that notice of the time and
place thereof is given to each Trustee in accordance with Section 2.4 hereof by
the Secretary or an Assistant Secretary or by the officer or the Trustees
calling the meeting.
SECTION 2.4. Notice of Meetings. Notice of any regular or special
meeting of the Trustees shall be sufficient if given in writing to each
Trustee, and if sent by mail at least five (5) days, by a nationally recognized
overnigh delivery service at least two (2) days or by facsimile at least
twenty-four (24) hours, before the meeting, addressed to his usual or last
known business or residence address, or if delivered to him in person at least
twenty-four (24) hours before the meeting. Notice of a special meeting need
not be given to any Trustee who was present at an earlier meeting, not more
than thirty-one (31) days prior to the subsequent meeting, at which the
subsequent meeting was called. Unless statute, these bylaws or a resolution of
the Trustees might otherwise dictate, notice need not state the business to be
transacted at or the purpose of any meeting of the Board of Trustees. Notice
of a meeting may be waived by any Trustee by written waiver of notice, executed
by him before or after the meeting, and such waiver shall be filed with the
records of the meeting. Attendance by a Trustee at a meeting shall constitute a
waiver of notice, except where a Trustee attends a meeting for the purpose of
protesting prior thereto or at its commencement the lack of notice. No notice
need be given of action proposed to be taken by unanimous written consent.
SECTION 2.5. Quorum: Presiding Trustee. At any meeting of the Trustees,
a Majority of the Trustees shall constitute a quorum. Any meeting may be
adjourned from time to time by a majority of the votes cast upon the question,
whether or not a quorum is present, and the meeting may be held as adjourned
without further notice. Unless the Trustees shall otherwise elect, generally
or in a particular case, the Chairman shall be the presiding Trustee at each
meeting of the Trustees or in the absence of the Chairman, the President shall
preside over the meeting. In the absence of both the Chairman and the
President, the Trustees present at the meeting shall elect one of their number
as presiding Trustee of the meeting.
SECTION 2.6. Participation by Telephone. One or more of the Trustees may
participate in a meeting thereof or of any Committee of the Trustees by means
of a conference telephone or similar communications equipment allowing all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at a meeting.
SECTION 2.7. Location of Meetings. Trustees' meetings may be held at any
place, within or without the State of Delaware.
SECTION 2.8. Actions by Trustees. Unless statute, the charter or
bylaws requires a greater proportion, action of a majority of the Trustees
present at a meeting at which a quorum is present is action of the Board of
Trustees. Voting at Trustees' meetings may be conducted orally, by show of
hands, or, if requested by any Trustee, by written ballot. The results of
all voting shall be recorded by the Secretary in the minute book.
2
<PAGE> 7
SECTION 2.9. Rulings of Presiding Trustee. All other rules of conduct
adopted and used at any Trustees' meeting shall be determined by the presiding
Trustee of such meeting, whose ruling on all procedural matters shall be
final.
SECTION 2.10. Trustees' Action in Writing. Nothing in this Article 2
shall limit the power of the Trustees to take action by means of a written
instrument without a meeting, as provided in Section 4.2 of the Declaration.
SECTION 2.11. Resignations. Any Trustee may resign at any time by
written instrument signed by him and delivered to the Chairman, the President
or the Secretary or to a meeting of the Trustees. Such resignation shall be
effective upon receipt unless specified to be effective at some other time.
SECTION 2.12. Chairman of the Board. The Trustees may from time to time
elect on of the Trustees to serve as Chairman of the Board of Trustees.
ARTICLE 3
OFFICERS
SECTION 3.1. Officers of the Trust. The officers of the Trust shall
consist of a President, a Treasurer and a Secretary, and may include one or
more Vice Presidents, Assistant Treasurers and Assistant Secretaries, and such
other officers as the Trustees may designate. Any person may hold more than
one office.
SECTION 3.2. Time and Terms of Election. The President, the Treasurer
and the Secretary shall be elected by the Trustees at their first meeting and
thereafter at the annual meeting of the Trustees, as provided in Section 4.2 of
the Declaration. Such officers shall hold office until the next annual
meeting of the Trustees and until their successors shall have been duly elected
and qualified, and may be removed at any meeting by the affirmative vote of a
Majority of the Trustees. All other officers of the Trust may be elected or
appointed at any meeting of the Trustees. Such officers shall hold office for
any term, or indefinitely, as determined by the Trustees, and shall be subject
to removal, with or without cause, at any time by the Trustees.
SECTION 3.3. Resignation and Removal. Any officer may resign at any time
by giving written notice to the Trustees. Such resignation shall take effect
at the time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
If the office of any officer or agent becomes vacant by reason of death,
resignation, retirement, disqualification, removal from office or otherwise,
the Trustees may choose a successor, who shall hold office for the unexpired
term in respect of which such vacancy occurred. Except to the extent expressly
provided in a written agreement with the Trust, no officer resigning or removed
shall have any right to any compensation for any period following such
resignation or removal, or any right to damage on account of such removal.
SECTION 3.4. Fidelity Bond. The Trustees may, in their discretion,
direct any officer appointed by them to furnish at the expense of the Trust a
fidelity bond approved by the Trustees, in such amount as the Trustees may
prescribe.
SECTION 3.5. President. The President shall be the chief executive
officer of the Trust and, subject to the supervision of the Trustees, shall
have general charge and supervision of the business, property and affairs of
the Trust and such other powers and duties as the Trustees may prescribe.
SECTION 3.6. Vice Presidents. In the absence or disability of the
President, the Vice President or, if there shall be more than one, the Vice
Presidents in the order of their seniority or as otherwise designated by the
Trustees, shall exercise all of the powers and duties of the President. The
Vice Presidents shall have the power to execute bonds, notes, mortgages and
other contracts, agreements and instruments in the name of the Trust, and shall
do and perform such other duties as the Trustees or the President shall direct.
SECTION 3.7. Treasurer and Assistant Treasurers. The Treasurer shall be
the chief financial officer of the Trust, and shall have the custody of the
Trust's funds and Securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Trust and shall deposit
all moneys, and other valuable effects in the name and to the credit of the
Trust, in such depositories as may be designated by the Trustees, taking
proper vouchers for such disbursements, shall have such other duties and
powers as may be prescribed from time to time by the Trustees, and shall
render to the Trustees, whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the Trust. If no
Controller is elected, the Treasurer shall also have the duties and powers of
the
3
<PAGE> 8
Controller, as provided in these Bylaws. Any Assistant Treasurer shall have
such duties and powers as shall be prescribed from time to time by the Trustees
or the Treasurer, and shall be responsible to and shall report to the
Treasurer. In the absence or disability of the Treasurer, the Assistant
Treasurer or, if there shall be more than one, the Assistant Treasurers in the
order of their seniority or as otherwise designated by the Trustees or the
Chairman, shall have the powers and duties of the Treasurer.
SECTION 3.8. Controller and Assistant Controllers. If a Controller is
elected, he shall be the chief accounting officer of the Trust and shall be in
charge of its books of account and accounting records and of its accounting
procedures, and shall have such duties and powers as are commonly incident to
the office of a controller, and such other duties and powers as may be
prescribed from time to time by the Trustees. The Controller shall be
responsible to and shall report to the Trustees, but in the ordinary
conduct of the Trust's business, shall be under the supervision of the
Treasurer. Any Assistant Controller shall have such duties and powers as shall
be prescribed from time to time by the Trustees or the Controller, and shall be
responsible to and shall report to the Controller. In the absence or
disability of the Controller, the Assistant Controller or, if there shall be
more than one, the Assistant Controllers in the order of their seniority or as
otherwise designated by the Trustees, shall have the powers and duties of the
Controller.
SECTION 3.9. Secretary and Assistant Secretaries. The Secretary
shall, if and to the extent requested by the Trustees, attend all meetings of
the Trustees, any Committee of the Trustees and/or the Shareholders and record
all votes and the minutes of proceedings in a book to be kept for that purpose,
shall give or cause to be given notice of all meetings of the Trustees, any
Committee of the Trustees, and of the Shareholders and shall perform such
other duties as may be prescribed by the Trustees. The Secretary, or in his
absence any Assistant Secretary, shall affix the Trust's seal to any instrument
requiring it, and when so affixed, it shall be attested by the signature of
the Secretary or an Assistant Secretary. The Secretary shall be the custodian
of the Share records and all other books, records and papers of the Trust
(other than financial) and shall see that all books, reports, statements,
certificates and other documents and records required by law are properly kept
and filed. In the absence or disability of the Secretary, the Assistant
Secretary or, if there shall be more than one, the Assistant Secretaries in the
order of their seniority or as otherwise designated by the Trustees, shall have
the powers and duties of the Secretary.
SECTION 3.10. Substitutions. In case of the absence or disability of
any officer of the Trust, or for any other reason that the Trustees may deem
sufficient, the Trustees may delegate, for the time being, the powers or
duties, or any of them, of such officer to any other officer, or to any
Trustee.
SECTION 3.11. Execution of Deeds, etc. Except as the Trustees may
generally or in particular cases otherwise authorize or direct, all deeds,
leases, transfers, contracts, proposals, bonds, notes, checks, drafts and other
obligations made, accepted or endorsed by the Trust shall be signed or endorsed
on behalf of the Trust by its properly authorized officers or agents as
provided in the Declaration.
SECTION 3.12. Power to Vote Securities. Unless otherwise ordered by
the Trustees, the Treasurer shall have full power and authority on behalf of
the Trust to give proxies for, and/or to attend and to act and to vote at, any
meeting of stockholders of any corporation in which the Trust may hold stock,
and at any such meeting the Treasurer or his proxy shall possess and may
exercise any and all rights and powers incident to the ownership of such stock
which, as the owner thereof, the Trust might have possessed and exercised if
present. The Trustees, by resolution from time to time, or, in the absence
thereof, the Treasurer, may confer like powers upon any other person or persons
as attorneys and proxies of the Trust.
ARTICLE 4
COMMITTEES
SECTION 4.1. Power of Trustees to Designate Committees. The Trustees, by
vote of a Majority of the Trustees, may elect from their number an Executive
Committee and any other Committees and may delegate thereto some or all of
their powers except those which by law, by the Declaration or by these
Bylaws may not be delegated; provided, that an Executive Committee shall not
be empowered to elect the President, the Treasurer or the Secretary, to amend
the Bylaws, to exercise the powers of the Trustees under this Section 4.1 or
under Section 4.3 hereof, or to perform any act for which the action of a
Majority of the Trustees is required by law, by the Declaration or by these
Bylaws. The members of any such Committee shall serve at the pleasure of the
Trustees.
4
<PAGE> 9
SECTION 4.2. Rules for Conduct of Committee Affairs. Except as otherwise
provided by the Trustees, each Committee elected or appointed pursuant to this
Article 4 may adopt such standing rules and regulations for the conduct of its
affairs as it may deem desirable, subject to review and approval of such
rules and regulations by the Trustees at the next succeeding meeting of the
Trustees, but in the absence of any such action or any contrary provisions by
the Trustees, the business of each Committee shall be conducted, so far as
practicable, in the same manner as provided herein and in the Declaration for
the Trustees.
SECTION 4.3. Trustees May Alter, Abolish, etc., Committees. Trustees may
at any time alter or abolish any Committee, change membership of any Committee,
or revoke, rescind, waive or modify action of any Committee or the authority
of any Committee with respect to any matter or class of matters; provided, that
no such action shall impair the rights of any third parties.
SECTION 4.4. Minutes: Review by Trustees. Any Committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees.
5
<PAGE> 10
ARTICLE 5
SEAL
The seal of the Trust, if any, may be affixed to any instrument, and the
seal and its attestation may be lithographed, engraved or otherwise printed on
any document with the same force and effect as if had been imprinted and
affixed manually in the same manner and with the same force and effect as if
done by a Delaware corporation. Unless otherwise required by the Trustees,
the seal shall not be necessary to be placed on, and its absence shall not
impair the validity of, any document, instrument or other paper executed and
delivered by or on behalf of the Trust.
ARTICLE 6
SHARES
SECTION 6.1. Issuance of Shares. The Trustees may issue an unlimited
number of Classes of Shares of any or all Series either in certificated or
uncertificated form, they may issue certificates to the holders of a Class of
Shares of a Series which was originally issued in uncertificated form, and if
they have issued Shares of any Series in certificated form, they may at any
time discontinue the issuance of Share certificates for such Series and may, by
written notice to such Shareholders of such Series require the surrender of
their Share certificates to the Trust for cancellation, which surrender and
cancellation shall not affect the ownership of Shares for such Series.
SECTION 6.2. Uncertificated Shares. For any Class of Shares for which
the Trustees issue Shares without certificates, the Trust or the Transfer Agent
may either issue receipts therefor or may keep accounts upon the books of the
Trust for the record holders of such Shares, who shall in either case be
deemed, for all purposes hereunder, to be the holders of such Shares as if they
had received certificates therefor and shall be held to have expressly assented
and agreed to the terms hereof and of the Declaration.
SECTION 6.3. Share Certificates. For any Class of Shares for which the
Trustees shall issue Share certificates, each Shareholder of such Class shall
be entitled to a certificate stating the number of Shares owned by him in such
form as shall be prescribed from time to time by the Trustees. Such
certificate shall be signed by the President or a Vice President, and by the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Trust. Such signatures may be facsimiles if the certificate
is countersigned by a Transfer Agent, or by a Registrar, other than a
Trustee, officer or employee of the Trust. In case any officer who has signed
or whose facsimile signature has been placed on such certificate shall cease to
be such officer before such certificate is issued, it may be issued by the
Trust with the same effect as if he were such officer at the time of its issue.
SECTION 6.4. Lost, Stolen, etc., Certificates. If any certificate
for certificated Shares shall be lost, stolen, destroyed or mutilated,
the Trustees may authorize the issuance of a new certificate of the same tenor
and for the same number of Shares in lieu thereof. The Trustees shall require
the surrender of any mutilated certificate in respect of which a new
certificate is issued, and may, in their discretion, before the issuance of a
new certificate, require the owner of a lost, stolen or destroyed certificate,
or the owner's legal representative, to make an affidavit or affirmation
setting forth such facts as to the loss, theft or destruction as they deem
necessary, and to give the Trust a bond in such reasonable sum as the Trustees
direct, in order to indemnify the Trust.
ARTICLE 7
TRANSFER OF SHARES
SECTION 7.1. Transfer Agents, Registrars, etc. As approved in Section
5.2(e) of the Declaration, the Trustees shall have the authority to employ and
compensate such transfer agents and registrars with respect to the Shares of
the Trust as the Trustees shall deem necessary or desirable. In addition, the
Trustees shall have the power to employ and compensate such dividend dispersing
agents, warrant agents and agents for reinvestment of dividends as they shall
deem necessary or desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
SECTION 7.2 Transfer of Shares. The Shares of the Trust shall be
transferable on the books of the Trust only upon delivery to the Trustees or a
transfer agent of the Trust of proper
6
<PAGE> 11
documentation as provided in Section 6.1(m) of the Declaration. The Trust, or
its transfer agents, shall be authorized to refuse any transfer unless and
until presentation of such evidence as may be reasonably required to show that
the requested transfer is proper.
SECTION 7.3 Registered Shareholders. The Trust may deem and treat the
holder of record of any Shares the absolute owner thereof for all purposes and
shall not be required to take any notice of any right or claim of right of any
other person.
ARTICLE 8
AMENDMENTS
SECTION 8.1. Bylaws Subject to Amendment. These Bylaws may be altered,
amended or repealed, in whole or in part, at any time by vote of the holders of
a majority of the Shares issued, outstanding and entitled to vote. The
Trustees, by vote of a Majority of the Trustees, may alter, amend or repeal
these Bylaws, in whole or in part, including Bylaws adopted by the
Shareholders, except with respect to any provision hereof which by law, the
Declaration or these Bylaws requires action by the Shareholders. Bylaws
adopted by the Trustees may be altered, amended or repealed by the
Shareholders.
SECTION 8.2. Notice of Proposal to Amend Bylaws Required. No proposal to
amend or repeal these Bylaws or to adopt new Bylaws shall be acted upon at a
meeting unless either (i) such proposal is stated in the notice or in the
waiver of notice, as the case may be, of the meeting of the Trustees or
Shareholders at which such action is taken, or (ii) all of the Trustees or
Shareholders, as the case may be, are present at such meeting and all agree to
consider such proposal without protesting the lack of notice.
7
<PAGE> 1
EXHIBIT 4(i)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921127-106
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921127-205
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921127-304
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(ii)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921128-104
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Tax Free High Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
TAX FREE HIGH INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921128-203
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Tax Free High Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
TAX FREE HIGH INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921128-302
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Tax Free High Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
TAX FREE HIGH INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iii)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921125-100
_________________
fully paid and nonassessable shares of beneficial interest of the par value
of $0.01 per share of Van Kampen American Capital California Insured Tax Free
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL CALIFORNIA
INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921125-209
_________________
fully paid and nonassessable shares of beneficial interest of the par value
of $0.01 per share of Van Kampen American Capital California Insured Tax Free
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 921125-308
_________________
fully paid and nonassessable shares of beneficial interest of the par value
of $0.01 per share of Van Kampen American Capital California Insured Tax Free
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL CALIFORNIA
INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920917-101
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Municipal Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920917-200
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Municipal Income Fund,
transferable on the books of the Fund by the holder thereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920917-309
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Municipal Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(v)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-301
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Intermediate Term
Municipal Income Fund, transferable on the books of the Fund by the holder
thereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-400
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Intermediate Term
Municipal Income Fund, transferable on the books of the Fund by the holder
thereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
NUMBER CLASS B
SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-509
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Intermediate Term
Municipal Income Fund, transferable on the books of the Fund by the holder
thereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INTERMEDIATE TERM MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(vi)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-608
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Florida Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL FLORIDA
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-707
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Florida Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL FLORIDA
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-806
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Florida Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL FLORIDA
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(vii)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-855
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital New Jersey Tax Free Income Fund,
transferable on the books of the Fund by the holder thereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-848
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital New Jersey Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-830
_________________
fully paid and nonassessable shares of beneficial interest of the par value
of $0.01 per share of Van Kampen American Capital New Jersey Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW JERSEY TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(viii)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-889
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital New York Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW YORK TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-871
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital New York Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW YORK TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
NUMBER CLASS B
SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 4
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 5
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 920940-863
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital New York Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
NEW YORK TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 6
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT (5)(i)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND (the "Fund"),
a series of Van Kampen American Capital TAX FREE TRUST, Delaware business
trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
(the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .525% of 1%
Next $500 million .50% of 1%
Next $500 million .475% of 1%
Over $1.5 billion .45% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net
<PAGE> 2
asset value of a share of beneficial interest of the Fund shall be deemed to be
the net asset value of such share as of the close of business of the last day on
which such calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(ii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND (the "Fund"), a
series of Van Kampen American Capital TAX FREE TRUST, Delaware business trust
(the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the
"Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .50% of 1%
Over $500 million .45% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset
<PAGE> 2
value of such share as of the close of business of the last day on which such
calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(iii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND (the
"Fund"), a series of Van Kampen American Capital TAX FREE TRUST, Delaware
business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $100 million .50% of 1%
Next $150 million .45% of 1%
Next $250 million .425% of 1%
Over $500 million .40% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net
<PAGE> 2
asset value is not calculated, the net asset value of a share of beneficial
interest of the Fund shall be deemed to be the net asset value of such share as
of the close of business of the last day on which such calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
--------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE
FUND
By: /S/ Dennis J. McDonnell
--------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(iv)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND (the "Fund"), a
series of Van Kampen American Capital TAX FREE TRUST, Delaware business trust
(the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the
"Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .50% of 1%
Over $500 million .45% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset
<PAGE> 2
value of such share as of the close of business of the last day on which such
calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(v)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL LIMITED TERM MUNICIPAL INCOME FUND (the
"Fund"), a series of Van Kampen American Capital TAX FREE TRUST, Delaware
business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .50% of 1%
Over $500 million .45% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset
<PAGE> 2
value of such share as of the close of business of the last day on which such
calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-----------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL LIMITED TERM MUNICIPAL
INCOME FUND
By: /S/ Dennis J. McDonnell
------------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(vi)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND (the
"Fund"), a series of Van Kampen American Capital TAX FREE TRUST, Delaware
business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .50% of 1%
Over $500 million .45% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset
<PAGE> 2
value of such share as of the close of business of the last day on which such
calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-----------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE
INCOME FUND
By: /S/ Dennis J. McDonnell
-----------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(vii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND (the
"Fund"), a series of Van Kampen American Capital TAX FREE TRUST, Delaware
business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .60% of 1%
Over $500 million .50% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset
<PAGE> 2
value of such share as of the close of business of the last day on which such
calculation was made.
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of
<PAGE> 3
any obligation or claim hereunder and that any such resort may only be had upon
the assets and property of the Fund.
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
---------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME
FUND
By: /S/ Dennis J. McDonnell
---------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (5)(viii)
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of April 7, 1995, by and
between VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND (the "Fund"),
a series of Van Kampen American Capital TAX FREE TRUST, Delaware business
trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
(the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs the Adviser
to act as the investment adviser for and to manage the investment and
reinvestment of the assets of the Fund in accordance with the Fund's investment
objective and policies and limitations, and to administer its affairs to the
extent requested by, and subject to the review and supervision of, the Board of
Trustees of the Fund for the period and upon the terms herein set forth. The
investment of funds shall be subject to all applicable restrictions of
applicable law and of the Declaration of Trust and By-Laws of the Trust, and
resolutions of the Board of Trustees of the Fund as may from time to time be in
force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts such
employment and agrees during such period to render such services, to supply
investment research and portfolio management (including without limitation the
selection of securities for the Fund to purchase, hold or sell and the
selection of brokers through whom the Fund's portfolio transactions are
executed, in accordance with the policies adopted by the Fund and its Board of
Trustees), to administer the business affairs of the Fund, to furnish offices
and necessary facilities and equipment to the Fund, to provide administrative
services for the Fund, to render periodic reports to the Board of Trustees of
the Fund, and to permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to such positions.
(c) Independent Contractor. The Adviser shall be deemed to be an
independent contractor under this Agreement and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Fund in any way or otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall be
free to render similar services or other services to others so long as its
services hereunder are not impaired thereby.
2. (a) Fee. For the services and facilities described in Section 1, the
Fund will accrue daily and pay to the Adviser at the end of each calendar month
an investment management fee equal to a percentage of the average daily net
assets of the Fund as follows:
<TABLE>
<CAPTION>
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
------------------ ---------------
<S> <C>
First $500 million .60% of 1%
Over $500 million .50% of 1%
</TABLE>
(b) Expense Limitation. The Adviser's compensation for any fiscal year
of the Fund shall be reduced by the amount, if any, by which the Fund's expense
for such fiscal year exceeds the most restrictive applicable expense
jurisdiction in which the Fund's shares are qualified for offer and sale, as
such limitations set forth in the most recent notice thereof furnished by the
Adviser to the Fund. For purposes of this paragraph there shall be excluded
from computation of the Fund's expenses any amount borne directly or indirectly
by the Fund which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any month expenses
of the Fund properly included in such calculation exceed 1/12 of the amount
permitted annually by the most restrictive applicable expense limitation, the
payment to the Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the total net expense
for the month will not exceed 1/12 of such amount. As of the end of the Fund's
fiscal year, however, the computations and payments shall be readjusted so that
the aggregate compensation payable to the Adviser for the year is equal to the
fee set forth in subsection (a) of this Section 2, diminished to the extent
necessary so that the expenses for the year do not exceed those permitted by
the applicable expense limitation.
(c) Determination of Net Asset Value. The net asset value of the Fund
shall be calculated as of the close of the New York Stock Exchange on each day
the Exchange is open for trading or such other time or times as the trustees
may determine in accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions of the Board of
Trustees of the Fund as from time to time in force. For the purpose of the
foregoing computations, on each such day when net asset value is not
calculated, the net asset value of a share of beneficial interest of the Fund
shall be deemed to be the net asset value of such share as of the close of
business of the last day on which such calculation was made.
<PAGE> 2
(d) Proration. For the month and year in which this Agreement becomes
effective or terminates, there shall be an appropriate proration of the
Adviser's fee on the basis of the number of days that the Agreement is in
effect during such month and year, respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund shall assume
and pay any expenses for services rendered by a custodian for the safekeeping
of the Fund's securities or other property, for keeping its books of account,
for any other charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be required to pay, and
the Fund shall assume and pay, the charges and expenses of its operations,
including compensation of the trustees (other than those who are interested
persons of the Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the distributor has agreed
to pay such compensation), charges and expenses of independent accountants, of
legal counsel and of any transfer or dividend disbursing agent, costs of
acquiring and disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on obligations
incurred by the Fund, costs of share certificates, membership dues in the
Investment Company Institute or any similar organization, costs of reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies on account of the registration of
securities issued by the Fund, filing of corporate documents or otherwise. The
Fund shall not pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from the Adviser
without first obtaining the written approval of the Adviser. The Adviser shall
arrange, if desired by the Fund, for officers or employees of the Adviser to
serve, without compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and subject to their
individual consent and to any limitations imposed by law.
4. Interested Persons. Subject to applicable statutes and regulations, it
is understood that trustees, officers, shareholders and agents of the Fund are
or may be interested in the Adviser as directors, officers, shareholders,
agents or otherwise and that the directors, officers, shareholders and agents
of the Adviser may be interest in the Fund as trustees, officers, shareholders,
agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of judgment
or of law, or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the date hereof
and shall remain in full force until the second anniversary of the date hereof
unless sooner terminated as hereinafter provided. This Agreement shall
continue in force from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the manner required
by the Investment Company Act of 1940, as amended.
(b) Termination. This Agreement shall automatically terminate in the
event of its assignment. This Agreement may be terminated at any time without
the payment of any penalty by the Fund or by the Adviser on sixty (60) days
written notice to the other party. The Fund may effect termination by action
of the Board of Trustees or by vote of a majority of the outstanding shares of
stock of the Fund, accompanied by appropriate notice. This Agreement may be
terminated at any time without the payment of any penalty and without advance
notice by the Board of Trustees or by vote of a majority of the outstanding
shares of the Fund in the event that it shall have been established by a court
of competent jurisdiction that the Adviser or any officer or director of the
Adviser has taken any action which results in a breach of the covenants of the
Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement shall not
affect the right of the Adviser to receive payment on any unpaid balance of the
compensation described in Section 2 earned prior to such termination.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder shall
not thereby affected.
8. Notices. Any notice under this Agreement shall be in writing,
addressed and delivered or mailed, postage prepaid, to the other party at such
address as such other party may designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as provided by
Section 8.1 of the Declaration of Trust of the Trust, (i) this Agreement has
been executed by officers of the Trust in their capacity as officers, and not
individually, and (ii) the shareholders, trustees, officers, employees and
other agents of the Trust and the Fund shall not personally be bound by or
liable hereunder, nor shall resort be had to their private property for the
satisfaction of any obligation or claim hereunder and that any such resort may
only be had upon the assets and property of the Fund.
<PAGE> 3
10. Governing Law. All questions concerning the validity, meaning and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.
<PAGE> 4
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /S/ Dennis J. McDonnell
-------------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
By: /S/ Dennis J. McDonnell
-------------------------------------
Dennis J. McDonnell, President
<PAGE> 1
EXHIBIT (6)(a)(i)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL INSURED TAX FREE INCOME FUND (the "Fund"), and VAN KAMPEN
AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
1
<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for Shares
received by the Distributor from dealers, agents and investors during each
period when particular net asset values and public offering prices are in effect
as provided in Section 3 hereof; and the price which the Distributor shall pay
for the Shares so purchased shall be the respective net asset value used in
determining the public offering price on which such orders were based. The
Distributor shall notify the Fund at the end of each such period, or as soon
thereafter on that business day as the orders received in such period have been
compiled, of the number of Shares of each class that the Distributor elects to
purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of Shares
under the federal securities laws, and the Fund will exercise
its best efforts to obtain said registration and qualification;
(ii) all expenses in connection with the printing of any notices of
shareholders' meetings, proxy and proxy statements and
enclosures therewith, as well as any other notice or
communication sent to shareholders in connection with any
meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses relating
to the Shares to existing shareholders;
(iii) all expenses of any federal or state original-issue tax or
transfer tax payable upon the issuance, transfer or delivery of
Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share certificates which
may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities laws
of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so paid and the
purposes for which such expenditures were made for each such class of Shares.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds
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<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts paid as
service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and
state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the
Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by
the Distributor shall be made only as agent for the Fund's account and pursuant
to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay,
for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of
this Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial purchases.
4
<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if any,
who controls the Fund within the meaning of Section 15 of the 1933 Act against
any loss, liability, damage, claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, damage, claim or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Shares, based upon the 1933 Act or any other statute
or common law, alleging any wrongful act of the Distributor or any of its
employees or alleging that the registration statement, Prospectus, shareholder
reports or other information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, insofar as the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Distributor in favor of the
Fund or any person indemnified to be deemed to protect the Fund or any such
person against any liability to which the Fund or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligation and duties under this Amended Agreement, or (ii) is the Distributor
to be liable under its indemnity agreement contained in this paragraph with
respect to any claim made against the Fund or any person indemnified unless the
Fund or person, as the case may be, shall have notified the Distributor in
writing of the claim within a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall have
received notice of service on any designated agent). However, failure to notify
the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. In the case of any notice to the Distributor, it shall be entitled
to participate, at its own expense, in the defense, or, if it so elects, to
assume the defense, of any suit brought to enforce the claim, but if the
Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
6
<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL INSURED TAX
FREE INCOME FUND
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(ii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL TAX FREE HIGH INCOME FUND (the "Fund"), and VAN KAMPEN
AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
1
<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for Shares
received by the Distributor from dealers, agents and investors during each
period when particular net asset values and public offering prices are in effect
as provided in Section 3 hereof; and the price which the Distributor shall pay
for the Shares so purchased shall be the respective net asset value used in
determining the public offering price on which such orders were based. The
Distributor shall notify the Fund at the end of each such period, or as soon
thereafter on that business day as the orders received in such period have been
compiled, of the number of Shares of each class that the Distributor elects to
purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
2
<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of Shares
under the federal securities laws, and the Fund will exercise
its best efforts to obtain said registration and qualification;
(ii) all expenses in connection with the printing of any notices of
shareholders' meetings, proxy and proxy statements and
enclosures therewith, as well as any other notice or
communication sent to shareholders in connection with any
meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses relating
to the Shares to existing shareholders;
(iii) all expenses of any federal or state original-issue tax or
transfer tax payable upon the issuance, transfer or delivery of
Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share certificates which
may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities laws
of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so paid and the
purposes for which such expenditures were made for each such class of Shares.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds
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<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts paid as
service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and
state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the
Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by
the Distributor shall be made only as agent for the Fund's account and pursuant
to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay,
for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of
this Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial purchases.
4
<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if any,
who controls the Fund within the meaning of Section 15 of the 1933 Act against
any loss, liability, damage, claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, damage, claim or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Shares, based upon the 1933 Act or any other statute
or common law, alleging any wrongful act of the Distributor or any of its
employees or alleging that the registration statement, Prospectus, shareholder
reports or other information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, insofar as the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Distributor in favor of the
Fund or any person indemnified to be deemed to protect the Fund or any such
person against any liability to which the Fund or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligation and duties under this Amended Agreement, or (ii) is the Distributor
to be liable under its indemnity agreement contained in this paragraph with
respect to any claim made against the Fund or any person indemnified unless the
Fund or person, as the case may be, shall have notified the Distributor in
writing of the claim within a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall have
received notice of service on any designated agent). However, failure to notify
the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. In the case of any notice to the Distributor, it shall be entitled
to participate, at its own expense, in the defense, or, if it so elects, to
assume the defense, of any suit brought to enforce the claim, but if the
Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
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<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL TAX FREE
HIGH INCOME FUND
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(iii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND (the "Fund"), and VAN KAMPEN
AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
1
<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for Shares
received by the Distributor from dealers, agents and investors during each
period when particular net asset values and public offering prices are in effect
as provided in Section 3 hereof; and the price which the Distributor shall pay
for the Shares so purchased shall be the respective net asset value used in
determining the public offering price on which such orders were based. The
Distributor shall notify the Fund at the end of each such period, or as soon
thereafter on that business day as the orders received in such period have been
compiled, of the number of Shares of each class that the Distributor elects to
purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
2
<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of Shares
under the federal securities laws, and the Fund will exercise
its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of any notices
of shareholders' meetings, proxy and proxy statements and
enclosures therewith, as well as any other notice or
communication sent to shareholders in connection with any
meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state original-issue tax or
transfer tax payable upon the issuance, transfer or delivery
of Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share certificates
which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities laws
of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so paid and the
purposes for which such expenditures were made for each such class of Shares.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds
3
<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts paid as
service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and
state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the
Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by
the Distributor shall be made only as agent for the Fund's account and pursuant
to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay,
for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of
this Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial purchases.
4
<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if any,
who controls the Fund within the meaning of Section 15 of the 1933 Act against
any loss, liability, damage, claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, damage, claim or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Shares, based upon the 1933 Act or any other statute
or common law, alleging any wrongful act of the Distributor or any of its
employees or alleging that the registration statement, Prospectus, shareholder
reports or other information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, insofar as the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Distributor in favor of the
Fund or any person indemnified to be deemed to protect the Fund or any such
person against any liability to which the Fund or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligation and duties under this Amended Agreement, or (ii) is the Distributor
to be liable under its indemnity agreement contained in this paragraph with
respect to any claim made against the Fund or any person indemnified unless the
Fund or person, as the case may be, shall have notified the Distributor in
writing of the claim within a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall have
received notice of service on any designated agent). However, failure to notify
the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. In the case of any notice to the Distributor, it shall be entitled
to participate, at its own expense, in the defense, or, if it so elects, to
assume the defense, of any suit brought to enforce the claim, but if the
Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
6
<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF
CONFLICT OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL CALIFORNIA
INSURED TAX FREE FUND
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(iv)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL MUNICIPAL INCOME FUND (the "Fund"), and VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
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<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for
Shares received by the Distributor from dealers, agents and investors during
each period when particular net asset values and public offering prices are
in effect as provided in Section 3 hereof; and the price which the Distributor
shall pay for the Shares so purchased shall be the respective net asset value
used in determining the public offering price on which such orders were based.
The Distributor shall notify the Fund at the end of each such period, or as
soon thereafter on that business day as the orders received in such period have
been compiled, of the number of Shares of each class that the Distributor
elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of Shares
under the federal securities laws, and the Fund will exercise
its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of any notices of
shareholders' meetings, proxy and proxy statements and
enclosures therewith, as well as any other notice or
communication sent to shareholders in connection with any
meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state original-issue tax or
transfer tax payable upon the issuance, transfer or delivery
of Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share certificates which
may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities laws
of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so paid and the
purposes for which such expenditures were made for each such class of Shares.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds
3
<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts paid as
service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and
state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the
Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by
the Distributor shall be made only as agent for the Fund's account and pursuant
to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay,
for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of
this Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial purchases.
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<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if any,
who controls the Fund within the meaning of Section 15 of the 1933 Act against
any loss, liability, damage, claim or expense (including the reasonable cost of
investigating or defending any alleged loss, liability, damage, claim or expense
and reasonable counsel fees incurred in connection therewith) arising by reason
of any person acquiring any Shares, based upon the 1933 Act or any other statute
or common law, alleging any wrongful act of the Distributor or any of its
employees or alleging that the registration statement, Prospectus, shareholder
reports or other information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or omitted to
state a material fact required to be stated or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, insofar as the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Distributor in favor of the
Fund or any person indemnified to be deemed to protect the Fund or any such
person against any liability to which the Fund or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligation and duties under this Amended Agreement, or (ii) is the Distributor
to be liable under its indemnity agreement contained in this paragraph with
respect to any claim made against the Fund or any person indemnified unless the
Fund or person, as the case may be, shall have notified the Distributor in
writing of the claim within a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall have
received notice of service on any designated agent). However, failure to notify
the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action is
brought otherwise than on account of its indemnity agreement contained in this
paragraph. In the case of any notice to the Distributor, it shall be entitled
to participate, at its own expense, in the defense, or, if it so elects, to
assume the defense, of any suit brought to enforce the claim, but if the
Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the Fund,
on written notice to the Distributor; (b) this Agreement shall immediately
terminate in the event of its assignment; and (c) this Agreement may be
terminated by the Distributor on ninety (90) days' written notice to the Fund.
Upon termination of this Agreement with respect to either class of Shares of the
Fund, the obligations of the parties hereunder shall cease and terminate with
respect to such class of Shares as of the date of such termination, except for
any obligation to respond for a breach of this Agreement committed prior to such
termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
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<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL MUNICIPAL
INCOME FUND
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(v)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL LIMITED TERM MUNICIPAL INCOME FUND (the "Fund"), and VAN
KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
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<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for
Shares received by the Distributor from dealers, agents and investors
during each period when particular net asset values and public offering prices
are in effect as provided in Section 3 hereof; and the price which the
Distributor shall pay for the Shares so purchased shall be the respective net
asset value used in determining the public offering price on which such orders
were based. The Distributor shall notify the Fund at the end of each such
period, or as soon thereafter on that business day as the orders received in
such period have been compiled, of the number of Shares of each class that the
Distributor elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund
will exercise its best efforts to obtain said registration
and qualification;
(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in
connection with any meeting of the shareholders or
otherwise, any annual, semiannual or other reports or
communications sent to the shareholders, and the expenses
of sending prospectuses relating to the Shares to existing
shareholders;
(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the
issuance, transfer or delivery of Shares from the Fund to
the Distributor; and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities
laws of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket
costs and expenses actually incurred by it in connection with distribution of
each class of Shares respectively in accordance with the terms of a plan (the
"12b-1 Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as
such 12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.
(d) The Fund shall compensate the Distributor for providing
services to, and the maintenance of, shareholder accounts in the Fund
(including prepaying service fees to eligible brokers, dealers and financial
intermediaries and expenses incurred in connection therewith) and the
Distributor may pay as agent for and on behalf of the Fund a service fee
with respect to each class of Shares to brokers, dealers and financial
intermediaries for the provision of shareholder services and the maintenance of
shareholder accounts in the Fund in the amount with respect to each class of
Shares set forth from time to time in the Fund's prospectus. The Fund shall
compensate the Distributor for such expenses in accordance with the terms of a
service plan (the "Service Plan"), as such Service Plan may be in effect from
time to time; provided, however, that no service fee payments shall be due or
paid to the Distributor hereunder with respect to a class of Shares unless and
until this Agreement shall have been approved for each such class by a majority
of the Board of Trustees of the Fund and by a majority of the Disinterested
Trustees by vote cast in person at a meeting called for the purpose of voting
on this Agreement. A copy of such Service Plan as in effect on the date of
this Agreement is attached as Exhibit II hereto. The Fund reserves the right
to terminate such Service Plan with respect to a class of Shares at any time,
as specified in the Plan. The persons authorized to direct the payment of
funds
3
<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the
Fund's Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each of the classes of Shares of the amounts
paid as service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and state
legislation, any applicable rules of the National Association of Securities
Dealers, Inc., and any applicable rules and regulations of the Securities and
Exchange Commission under the 1940 Act, the Distributor may accept offers of
holders of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in the then current
Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the Fund
may specify of the number of each class of Shares, respectively, repurchased
for the Fund's account and the time or times of such repurchases, and the Fund
shall notify the Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as described below,
if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by the
Distributor shall be made only as agent for the Fund's account and pursuant to
the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay, for the
Fund's account, the repurchase price (together with any applicable contingent
deferred sales charge) of any Shares so repurchased for the Fund against the
authorized transfer of book shares from an open account and against delivery of
any other documentation required by the Board of Trustees of the Fund or, in
the case of certificated Shares, against delivery of the certificates
representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other compensation in
respect of any repurchases of FESC Shares for the Fund under the foregoing
authorization and appointment as agent. With respect to any repurchase of CDSC
Shares or Combination Shares, the Distributor shall receive the deferred sales
charge, if any, applicable to the respective class of Shares that have been
held for less than a specified period of time with respect to such class as set
forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of this
Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial
purchases.
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<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall
have received notice of service on any designated agent). However, failure to
notify the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action
is brought otherwise than on account of its indemnity agreement contained in
this paragraph. In the case of any notice to the Distributor, it shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
6
<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL LIMITED TERM
MUNICIPAL INCOME FUND
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(vi)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND (the "Fund"), and VAN
KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
1
<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for
Shares received by the Distributor from dealers, agents and investors
during each period when particular net asset values and public offering prices
are in effect as provided in Section 3 hereof; and the price which the
Distributor shall pay for the Shares so purchased shall be the respective net
asset value used in determining the public offering price on which such orders
were based. The Distributor shall notify the Fund at the end of each such
period, or as soon thereafter on that business day as the orders received in
such period have been compiled, of the number of Shares of each class that the
Distributor elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
2
<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund will
exercise its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in connection
with any meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying and
maintaining qualification of the Shares for sale under the securities laws of
the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs and
expenses actually incurred by it in connection with distribution of each class
of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.
(d) The Fund shall compensate the Distributor for providing services to,
and the maintenance of, shareholder accounts in the Fund (including prepaying
service fees to eligible brokers, dealers and financial intermediaries and
expenses incurred in connection therewith) and the Distributor may pay as agent
for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"),
as such Service Plan may be in effect from time to time; provided, however,
that no service fee payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees of the
Fund and by a majority of the Disinterested Trustees by vote cast in person at
a meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The
persons authorized to direct the payment of funds
3
<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each of the classes of Shares of the amounts
paid as service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and state
legislation, any applicable rules of the National Association of Securities
Dealers, Inc., and any applicable rules and regulations of the Securities and
Exchange Commission under the 1940 Act, the Distributor may accept offers of
holders of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in the then current
Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the Fund
may specify of the number of each class of Shares, respectively, repurchased
for the Fund's account and the time or times of such repurchases, and the Fund
shall notify the Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as described below,
if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by the
Distributor shall be made only as agent for the Fund's account and pursuant to
the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay, for the
Fund's account, the repurchase price (together with any applicable contingent
deferred sales charge) of any Shares so repurchased for the Fund against the
authorized transfer of book shares from an open account and against delivery of
any other documentation required by the Board of Trustees of the Fund or, in
the case of certificated Shares, against delivery of the certificates
representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other compensation in
respect of any repurchases of FESC Shares for the Fund under the foregoing
authorization and appointment as agent. With respect to any repurchase of CDSC
Shares or Combination Shares, the Distributor shall receive the deferred sales
charge, if any, applicable to the respective class of Shares that have been
held for less than a specified period of time with respect to such class as set
forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of this
Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial
purchases.
4
<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of
the claim shall have been served upon the Fund or person (or after the Fund or
such person shall have received notice of service on any designated agent).
However, failure to notify the Distributor of any claim shall not relieve the
Distributor from any liability which it may have to the Fund or any person
against whom the action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. In the case of any notice to the
Distributor, it shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense, of any suit brought to
enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by it and satisfactory to the
Fund, to its officers and trustees and to any controlling person or persons,
defendant or defendants in the suit. In the event that the Distributor elects
to assume the defense of any suit and retain counsel, the Fund or controlling
persons, defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them. If the Distributor does not elect to
assume the defense of any suit, it will reimburse the Fund, officers and
trustees or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. The
Distributor agrees to notify the Fund promptly of the commencement of any
litigation or proceedings against it in connection with the issue and sale of
any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
6
<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT
OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL FLORIDA
INSURED TAX FREE INCOME FUND
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6) (a) (vii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND (the "Fund"), and VAN KAMPEN
AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
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<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for
Shares received by the Distributor from dealers, agents and investors
during each period when particular net asset values and public offering prices
are in effect as provided in Section 3 hereof; and the price which the
Distributor shall pay for the Shares so purchased shall be the respective net
asset value used in determining the public offering price on which such orders
were based. The Distributor shall notify the Fund at the end of each such
period, or as soon thereafter on that business day as the orders received in
such period have been compiled, of the number of Shares of each class that the
Distributor elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund will
exercise its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in connection
with any meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state original-issue tax or
transfer tax payable upon the issuance, transfer or delivery
of Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying
and maintaining qualification of the Shares for sale under the securities laws
of the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs
and expenses actually incurred by it in connection with distribution of each
class of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so paid and the
purposes for which such expenditures were made for each such class of Shares.
(d) The Fund shall compensate the Distributor for providing services
to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds
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<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the
Fund's Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each of the classes of Shares of the amounts
paid as service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and
state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the
Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by
the Distributor shall be made only as agent for the Fund's account and pursuant
to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay,
for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of
this Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial purchases.
4
<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first
5
<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall
have received notice of service on any designated agent). However, failure to
notify the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action
is brought otherwise than on account of its indemnity agreement contained in
this paragraph. In the case of any notice to the Distributor, it shall
be entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
6
<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL NEW JERSEY
TAX FREE INCOME FUND
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (6)(a)(viii)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of April 7, 1995 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a
Delaware business trust (the "Trust"), on behalf of its series, VAN KAMPEN
AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND (the "Fund"), and VAN KAMPEN
AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware corporation (the
"Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of
1
<PAGE> 2
transmission and cancellation of orders) to fill unconditional orders for
Shares received by the Distributor from dealers, agents and investors during
each period when particular net asset values and public offering prices are in
effect as provided in Section 3 hereof; and the price which the Distributor
shall pay for the Shares so purchased shall be the respective net asset value
used in determining the public offering price on which such orders were based.
The Distributor shall notify the Fund at the end of each such period, or as
soon thereafter on that business day as the orders received in such period have
been compiled, of the number of Shares of each class that the Distributor
elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund will
exercise its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in connection
with any meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of qualifying and
maintaining qualification of the Shares for sale under the securities laws of
the various states. The Distributor will also permit its officers and
employees to serve without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs and
expenses actually incurred by it in connection with distribution of each class
of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.
(d) The Fund shall compensate the Distributor for providing services to,
and the maintenance of, shareholder accounts in the Fund (including prepaying
service fees to eligible brokers, dealers and financial intermediaries and
expenses incurred in connection therewith) and the Distributor may pay as agent
for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"),
as such Service Plan may be in effect from time to time; provided, however,
that no service fee payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees of the
Fund and by a majority of the Disinterested Trustees by vote cast in person at
a meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The
persons authorized to direct the payment of funds
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<PAGE> 4
pursuant to this Agreement and the Service Plan shall provide to the Fund's
Board of Trustees, and the Trustees shall review, at least quarterly, a
written report with respect to each of the classes of Shares of the amounts
paid as service fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and state
legislation, any applicable rules of the National Association of Securities
Dealers, Inc., and any applicable rules and regulations of the Securities and
Exchange Commission under the 1940 Act, the Distributor may accept offers of
holders of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in the then current
Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the Fund
may specify of the number of each class of Shares, respectively, repurchased
for the Fund's account and the time or times of such repurchases, and the Fund
shall notify the Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as described below,
if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by the
Distributor shall be made only as agent for the Fund's account and pursuant to
the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay, for the
Fund's account, the repurchase price (together with any applicable contingent
deferred sales charge) of any Shares so repurchased for the Fund against the
authorized transfer of book shares from an open account and against delivery of
any other documentation required by the Board of Trustees of the Fund or, in
the case of certificated Shares, against delivery of the certificates
representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other compensation in
respect of any repurchases of FESC Shares for the Fund under the foregoing
authorization and appointment as agent. With respect to any repurchase of CDSC
Shares or Combination Shares, the Distributor shall receive the deferred sales
charge, if any, applicable to the respective class of Shares that have been
held for less than a specified period of time with respect to such class as set
forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of this
Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their
concession with respect to FESC Shares purchased by them or their principals
and redeemed or repurchased by the Fund or by the Distributor as agent within
seven business days after the date of the Distributor's confirmation of such
initial purchases.
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<PAGE> 5
7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first
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<PAGE> 6
written notification giving information of the nature of the claim shall have
been served upon the Fund or person (or after the Fund or such person shall
have received notice of service on any designated agent). However, failure to
notify the Distributor of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against whom the action
is brought otherwise than on account of its indemnity agreement contained in
this paragraph. In the case of any notice to the Distributor, it shall be
entitled to participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Fund, to its officers and trustees
and to any controlling person or persons, defendant or defendants in the suit.
In the event that the Distributor elects to assume the defense of any suit and
retain counsel, the Fund or controlling persons, defendants in the suit, shall
bear the fees and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it will reimburse
the Fund, officers and trustees or controlling person or persons, defendant or
defendants in the suit, for the reasonable fees and expenses of any counsel
retained by them. The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in connection with the
issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY,
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<PAGE> 7
THE LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST, on behalf of its series, VAN
KAMPEN AMERICAN CAPITAL NEW YORK TAX
FREE INCOME FUND
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Vice President and Secretary
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
-----------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (8)(b)
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 10th day of July, 1995 by and between each of
THE VAN KAMPEN MERRITT OPEN END FUNDS set forth on Schedule "A" hereto, which
are organized under the laws of the Commonwealth of Massachusetts, having their
principal office and place of business at Oakbrook Terrace, Illinois
(collectively, the "Funds"), and ACCESS INVESTOR SERVICES, INC., a Delaware
corporation, having its principal office at Houston, Texas, and its principal
place of business at Kansas City, Missouri ("ACCESS").
R E C I T A L:
WHEREAS, each of the Funds desires to appoint ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent, and ACCESS
desires to accept such appointments;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF ACCESS.
1.01 Subject to the terms and conditions set forth in this
Agreement, each of the Funds hereby employs and appoints ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent.
1.02 ACCESS hereby accepts such employment and appointments and
agrees that on and after the effective date of this Agreement it will act as
the transfer agent, dividend disbursing agent and shareholder service agent for
each of the Funds on the terms and conditions set forth herein.
1.03 ACCESS agrees that its duties and obligations hereunder
will be performed in a competent, efficient and workmanlike manner with due
diligence in accordance with reasonable industry practice, and that the
necessary facilities, equipment and personnel for such performance will be
provided.
1.04 In order to assure compliance with section 1.03 and to
implement a cooperative effort to improve the quality of transfer agency and
shareholder services received by each of the Funds and its shareholders, ACCESS
agrees to provide and maintain quantitative performance objectives, including
maximum target turn-around times and
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<PAGE> 2
maximum target error rates, for the various services provided hereunder.
ACCESS also agrees to provide a reporting system designed to provide the Board
of Trustees of each of the Funds (the "Board") on a quarterly basis with
quantitative data comparing actual performance for the period with the
performance objectives. The foregoing procedures are designed to provide a
basis for continuing monitoring by the Board of the quality of services
rendered hereunder.
ARTICLE 2. FEES AND EXPENSES.
2.01 For the services to be performed by ACCESS pursuant to this
Agreement, each of the Funds agrees to pay ACCESS the fees provided in the fee
schedules agreed upon from time to time by each of the Funds and ACCESS.
2.02 In addition to the amounts paid under section 2.01 above,
each of the Funds agrees to reimburse ACCESS promptly for such Fund's
reasonable out-of-pocket expenses or advances paid on its behalf by ACCESS in
connection with its performance under this Agreement for postage, freight,
envelopes, checks, drafts, continuous forms, reports and statements, telephone,
telegraph, costs of outside mailing firms, necessary outside record storage
costs, media for storage of records (e.g., microfilm, microfiche and computer
tapes) and printing costs incurred due to special requirements of such Fund.
In addition, any other special out-of-pocket expenses paid by ACCESS at the
specific request of any of the Funds will be promptly reimbursed by the
requesting Fund. Postage for mailings of dividends, proxies, Fund reports and
other mailings to all shareholder accounts shall be advanced to ACCESS by the
concerned Fund three business days prior to the mailing date of such materials.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ACCESS.
ACCESS represents and warrants to each of the Funds that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of the State of Delaware.
3.02 It is duly qualified to carry on its business in the states
of Texas and Missouri.
3.03 It is empowered under applicable laws and by its charter
and bylaws to enter into and perform this Agreement.
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<PAGE> 3
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have during the term of this
Agreement access to the necessary facilities, equipment and personnel to
perform its duties and obligations hereunder.
3.06 It will maintain a system regarding "as of" transactions as
follows:
(a) Each "as of" transaction effected at a price other
than that in effect on the day of processing for which an estimate has
not been given to any of the affected Funds and which is necessitated
by ACCESS' error, or delay for which ACCESS is responsible or which
could have been avoided through the exercise of reasonable care, will
be identified, and the net effect of such transactions determined, on
a daily basis for each such Fund.
(b) The cumulative net effect of the transactions
included in paragraph (a) above will be determined each day throughout
each month. If, on any day during the month, the cumulative net
effect upon any Fund is negative and exceeds an amount equivalent to
1/2 of 1 cent per share of such Fund, ACCESS shall promptly make a
payment to such Fund (in cash or through use of a credit as described
in paragraph (c) below) in such amount as necessary to reduce the
negative cumulative net effect to less than 1/2 of 1 cent per share of
such Fund. If on the last business day of the month the cumulative
net effect (adjusted by the amount of any payments pursuant to the
preceding sentence) upon any Fund is negative, such Fund shall be
entitled to a reduction in the monthly transfer agency fee next
payable by an equivalent amount, except as provided in paragraph (c)
below. If on the last business day of the month the cumulative net
effect (similarly adjusted) upon any Fund is positive, ACCESS shall be
entitled to recover certain past payments and reductions in fees, and
to a credit against all future payments and fee reductions made under
this paragraph to such Fund, as described in paragraph (c) below.
(c) At the end of each month, any positive cumulative
net effect upon any Fund shall be deemed to be a credit to ACCESS
which shall first be applied to recover any payments and fee
reductions made by ACCESS to such Fund under paragraph (b) above
during the calendar year by increasing the amount
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<PAGE> 4
of the monthly transfer agency fee next payable in an amount equal to
prior payments and fee reductions made during such year, but not
exceeding the sum of that month's credit and credits arising in prior
months during such year to the extent such prior credits have not
previously been utilized as contemplated by this paragraph (c). Any
portion of a credit to ACCESS not so used shall remain as a credit to
be used as payment against the amount of any future negative
cumulative net effects that would otherwise require a payment or fee
reduction to such Fund pursuant to paragraph (b) above.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE FUNDS.
Each of the Funds hereby represents and warrants on behalf
of itself only and not any other Funds that are a party to this Agreement that:
4.01 It is duly organized and existing and in good standing under
the laws of the Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and regulations and by
its Declaration of Trust and by-laws to enter into and perform this Agreement.
4.03 All requisite proceedings have been taken by its Board to
authorize it to enter into and perform this Agreement.
4.04 It is an open-end, diversified, management investment
company registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933,
as amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.
ARTICLE 5. INDEMNIFICATION.
5.01 ACCESS shall not be responsible for and each of the Funds
shall indemnify and hold ACCESS harmless from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities arising out of or attributable to:
4
<PAGE> 5
(a) All actions of ACCESS required to be taken by
ACCESS for the benefit of such Fund pursuant to this Agreement,
provided ACCESS has acted in good faith with due diligence and without
negligence or willful misconduct.
(b) The reasonable reliance by ACCESS on, or
reasonable use by ACCESS of, information, records and documents which
have been prepared or maintained by or on behalf of such Fund or have
been furnished to ACCESS by or on behalf of such Fund.
(c) The reasonable reliance by ACCESS on, or the
carrying out by ACCESS of, any instructions or requests of such Fund.
(d) The offer or sale of such Fund's shares in
violation of any requirement under the federal securities laws or
regulations or the securities laws or regulations of any state or in
violation of any stop order or other determination or ruling by any
federal agency or any state with respect to the offer or sale of such
shares in such state unless such violation results from any failure by
ACCESS to comply with written instructions of such Fund that no offers
or sales of such Fund's shares be made in general or to the residents
of a particular state.
(e) Such Fund's refusal or failure to comply with the
terms of this Agreement, or such Fund's lack of good faith, negligence
or willful misconduct or the breach of any representation or warranty
of such Fund hereunder.
5.02 ACCESS shall indemnify and hold each of the Funds harmless
from and against any and all losses, damages, costs, charges, reasonable
counsel fees, payments, expenses and liability arising out of or attributable
to ACCESS' refusal or failure to comply with the terms of this Agreement, or
ACCESS' lack of good faith, negligence or willful misconduct, or the breach of
any representation or warranty of ACCESS hereunder.
5.03 At any time ACCESS may apply to any authorized officer of
any of the Funds for instructions, and may consult with any of the Funds' legal
counsel, at the expense of such concerned Fund, with respect to any matter
arising in connection with the services to be performed by ACCESS under this
Agreement, and ACCESS shall not be liable and shall be indemnified by such
concerned Fund for any action taken or omitted by it in good faith in
reasonable reliance upon such instructions or upon the opinion of such counsel.
ACCESS shall be protected and
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<PAGE> 6
indemnified in acting upon any paper or document reasonably believed by ACCESS
to be genuine and to have been signed by the proper person or persons and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the concerned Fund. ACCESS shall also
be protected and indemnified in recognizing stock certificates which ACCESS
reasonably believes to bear the proper manual or facsimile signatures of the
officers of the concerned Fund, and the proper countersignature of any former
transfer agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event any party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage, or other causes reasonably beyond
its control, such party shall not be liable for damages to the other for any
damages resulting from such failure to perform or otherwise from such causes.
5.05 In no event and under no circumstances shall any party to
this Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which one party
may be required to indemnify another, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The
party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
ARTICLE 6. COVENANTS OF EACH OF THE FUNDS AND ACCESS.
6.01 Each of the Funds shall promptly furnish to ACCESS the
following:
(a) Certified copies of the resolution of its Board
authorizing the appointment of ACCESS and the execution and delivery
of this Agreement.
(b) Certified copies of its Declaration of Trust and
by-laws and all amendments thereto.
6
<PAGE> 7
6.02 ACCESS hereby agrees to maintain facilities and procedures
reasonably acceptable to each of the Funds for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 ACCESS shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable; provided,
however, that all accounts, books and other records of each of the Funds
(hereinafter referred to as "Fund Records") prepared or maintained by ACCESS
hereunder shall be maintained and kept current in compliance with Section 31 of
the Investment Company Act of 1940 and the Rules thereunder (such Section and
Rules being hereinafter referred to as the "1940 Act Requirements"). To the
extent required by the 1940 Act Requirements, ACCESS agrees that all Fund
Records prepared or maintained by ACCESS hereunder are the property of the
concerned Fund and shall be preserved and made available in accordance with the
1940 Act Requirements, and shall be surrendered promptly to the concerned Fund
on its request. ACCESS agrees at such reasonable times as may be requested by
the Board and at least quarterly to provide (i) written confirmation to the
Board that all Fund Records are maintained and kept current in accordance with
the 1940 Act Requirements, and (ii) such other reports regarding its
performance hereunder as may be reasonably requested by the Board.
6.04 ACCESS and each of the Funds agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of
any of the Fund Records, ACCESS will endeavor to notify each of the concerned
Funds and to secure instructions from an authorized officer of each
7
<PAGE> 8
of the concerned Funds as to such inspection. ACCESS reserves the right,
however, to exhibit such Fund Records to any person whenever it is advised by
its counsel that it may be held liable for the failure to exhibit such Fund
Records to such person.
ARTICLE 7. TERM AND TERMINATION OF AGREEMENT.
7.01 This Agreement shall remain in effect from the date hereof
through December 31, 1996; provided, however, that this Agreement may be
terminated by any party with respect to that party for good and reasonable
cause at any time by giving written notice to the other party at least 120 days
prior to the date on which such termination is to be effective. Any unpaid
fees or reimbursable expenses payable to ACCESS shall be due on any such
termination date. ACCESS agrees to use its best efforts to cooperate with each
of the Funds and the successor transfer agent or agents in accomplishing an
orderly transition.
7.02 Subject to the prior approval of the Board, this Agreement
shall be renewed and extended for periods of not more than one year each,
unless and until this Agreement is terminated in accordance with section 7.01
above.
ARTICLE 8. MISCELLANEOUS.
8.01 Except as provided in section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by any party
without the written consent of ACCESS or the concerned Fund, as the case may
be; provided, however, that no consent shall be required for any merger of any
of the Funds with, or any sale of all or substantially all the assets of any of
the Funds to, another investment company.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 ACCESS may, without further consent on the part of any of
the Funds, subcontract with DST, Inc., a Missouri corporation, or any other
qualified servicer, for the performance of data processing activities;
provided, however, that ACCESS shall be as fully responsible to each of the
Funds for the acts and omissions of DST, Inc., or other qualified servicer as
it is for its own acts and omissions.
8
<PAGE> 9
8.04 ACCESS may, without further consent on the part of any of
the Funds, provide services to its affiliated companies. Such services may be
provided at cost.
8.05 This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and supersedes any
prior agreement with respect thereto, whether oral or written, and this
Agreement may not be modified except by written instrument executed by the
affected parties.
8.06 The Declarations of Trust establishing each Fund as a
Massachusetts Business Trust (each a "Trust"), copies of which, together with
all amendments thereto (the "Declarations") are on file in the office of the
Secretary of the Commonwealth of Massachusetts, provide that the names of each
Fund refer to the Trustees under each of the Declarations collectively as
Trustees, but not as individuals or personally; and no Trustee, shareholder,
officer, employee or agent of any such Trust shall be held to any personal
liability, nor shall resort be had to their respective private property for the
satisfaction of any obligation or claim or otherwise in connection with the
affairs of any such Trust, but that each respective Trust's Estate only shall
be liable.
8.07 For each of those Funds that have one or more portfolios as
set forth in Schedule "A" hereto, all obligations of those Funds under this
Agreement shall apply only on a portfolio-by-portfolio basis and the assets of
one portfolio shall not be liable for the obligations of any other.
8.08 In the event of a change in the business or regulatory
environment affecting all or any portion of this Agreement, the parties hereto
agree to renegotiate such affected portions in good faith.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf and through their duly
authorized officers, as of the date first above written.
EACH OF THE VAN KAMPEN MERRITT OPEN END
FUNDS LISTED ON SCHEDULE "A" HERETO
BY: /s/ SCOTT E. MARTIN
------------------------------------
Scott E. Martin, Assistant Secretary
ATTEST:
/s/ DAVID L. KITE
- ------------------------------------
ACCESS INVESTOR SERVICES, INC.
BY: /s/ PAUL R. WOLKENBERG
------------------------------------
Paul R. Wolkenberg, President and
Chief Executive Officer
ATTEST:
/s/ DAVID L.KITE
- ------------------------------------
10
<PAGE> 11
SCHEDULE "A"
VAN KAMPEN MERRITT OPEN-END FUNDS
<TABLE>
<CAPTION>
State of Type
Fund Name Organization [Business Trust "T"]
===========================================================================================================
<S> <C> <C>
Van Kampen Merritt U. S. Government Fund(1) MA T
Van Kampen Merritt Insured Tax Free Income Fund(2) MA T
Van Kampen Merritt Tax Free High Income Fund(2) MA T
Van Kampen Merritt California Insured Tax Free Fund(2) MA T
Van Kampen Merritt Municipal Income Fund(2) MA T
Van Kampen Merritt Limited Term Municipal Income Fund(2) MA T
Van Kampen Merritt Florida Insured Tax Free Income Fund(2) MA T
Van Kampen Merritt New Jersey Tax Free Income Fund(2) MA T
Van Kampen Merritt New York Tax Free Income Fund(2) MA T
Van Kampen Merritt High Yield Fund(3) MA T
Van Kampen Merritt Short-Term Global Income Fund(3) MA T
Van Kampen Merritt Adjustable Rate U.S. Government Fund(3) MA T
Van Kampen Merritt Strategic Income Fund(3) MA T
Van Kampen Merritt Emerging Markets Income Fund(3) MA T
Van Kampen Merritt Growth and Income Fund(4) MA T
Van Kampen Merritt Utility Fund(4) MA T
Van Kampen Merritt Balanced Fund(4) MA T
Van Kampen Merritt Pennsylvania Tax Free Income Fund PA T
Van Kampen Merritt Money Market Fund(5) MA T
Van Kampen Merritt Tax Free Money Fund MA T
</TABLE>
____________________________________________________
(1) A sub-trust of Van Kampen Merritt U. S. Government Trust
(2) A sub-trust of Van Kampen Merritt Tax Free Fund
(3) A sub-trust of Van Kampen Merritt Trust
(4) A sub-trust of Van Kampen Merritt Equity Trust
(5) A series of Van Kampen Merritt Money Market Trust
11
<PAGE> 12
SCHEDULE "A" (CONTINUED)
VAN KAMPEN MERRITT OPEN-END FUNDS
<TABLE>
<CAPTION>
State of Type
Fund Name Organization [Business Trust "T"]
===========================================================================================================
<S> <C> <C>
Van Kampen American Capital Foreign Securities Fund DE T
</TABLE>
12
<PAGE> 1
EXHIBIT (9)(a)
AMENDED AND RESTATED
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, dated May 12, 1995, by and between the parties set forth
in Schedule A hereto (designated collectively hereafter as the "Funds") and VAN
KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation
("Advisory Corp.').
W I T N E S S E T H:
WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, Advisory Corp. has the capability of providing certain accounting
services to the Funds; and
WHEREAS, each desires to utilized Advisory Corp. in the provision of such
accounting services; and
WHEREAS, Advisory Corp. intends to maintain its staff in order to
accommodate the provision of all such services.
NOW THEREFORE, in consideration of the premises and the mutual covenants
spelled out herein, it is agreed between the parties hereto as follows:
1. Appointment of Advisory Corp.. As agent, Advisory Corp. shall provide each
of the Funds the accounting services ("Accounting Services") as set forth in
Paragraph 2 of this Agreement. Advisory Corp. accepts such appointment and
agrees to furnish the Accounting Services in return for the compensation
provided in Paragraph 3 of this Agreement.
2. Accounting Services to be Provided. Advisory Corp. will provide to the Funds
the following accounting related services, including without limitation,
accurate maintenance of the specific Fund's books and records such as are
within the scope of control of Advisory Corp. and are required by the
applicable securities statutes and regulations, preparation of each Fund's
financial reports and other accounting and tax related notice information to
shareholders, the assimilation and interpretation of accounting data for
meaningful management review. Advisory Corp. shall hire persons (collectively
the "Accounting Service Group") as needed to provide such Accounting Services
and in such numbers as the parties to this Agreement may agree from time to
time.
3. Expenses and Reimbursements. The Accounting Service expenses (the
"Accounting Service Expenses") for which Advisory Corp. may be reimbursed are
salary and salary related benefits, including but not limited to bonuses, group
insurances and other regular wages ("Salaries") paid to the personnel of the
Accounting Service Group as discussed from time to time with the Board of
Trustees of each of the Funds.
<PAGE> 2
The Accounting Services Expenses will be paid by Advisory Corp. and
reimbursed by the Funds. Advisory Corp. will tender to each Fund a monthly
invoice as of the last business day of each month which shall certify the total
support service expenses expended. Except as provided herein, Advisory Corp.
will receive no other compensation in connection with Accounting Services
rendered in accordance with this Agreement, and Advisory Corp. will be
responsible for all other expenses relating to the providing of Accounting
Services.
4. Payment for Accounting Service Expenses Among the Funds. As to one quarter
(25%) of the Accounting Service Expenses incurred under the Agreement, the
expense shall be allocated between all Funds based on the number of classes of
shares of beneficial interest that each respective Fund has issued.
5. Maintenance of Records. All records maintained by Advisory Corp. in
connection with the performance of its duties under this agreement will remain
the property of each respective Fund and will be preserved by Advisory Corp.
for the periods prescribed in Section 31 of the 1940 Act and the rules
thereunder or such other applicable rules that may be adopted from time to time
under the act. In the event of termination of the Agreement, such records will
be promptly delivered to the respective Funds. Such records may be inspected
by the respective Funds at reasonable times.
6. Liability of Advisory Corp. Advisory Corp. shall not be liable to any Fund
for any action taken or thing done by it or its agents or contractors on behalf
of the fund in carrying out the terms and provisions of the Agreement if done
in good faith and without negligence or misconduct on the part of Advisory
Corp., its agents or contractors.
7. Indemnification By Funds. Each Fund will indemnify and hold Advisory Corp.
harmless from all lost, cost, damage and expense, including reasonable expenses
for legal counsel, incurred by Advisory Corp. resulting from: (a) any claim,
demand, action or suit in connection with Advisory Corp.'s acceptance of this
Agreement; (b) any action or omission by advisory Corp. in the performance of
its duties hereunder; (c) Advisory Corp.'s acting upon instructions believed by
it to have been executed by a duly authorized officer of the Fund; or (d)
Advisory Corp.'s acting upon information provided by the Fund in form and under
policies agreed to by Advisory Corp. and the Fund. Advisory Corp. shall not be
entitled to such indemnification in respect of actions or omissions
constituting negligence or willful misconduct of Advisory Corp. or its agents
or contractors. Prior to confessing any claim against it which may be subject
to this indemnification, Advisory Corp. shall give the Fund reasonable
opportunity to defend against said claim in its own name or in the name of
Advisory Corp.
8. Indemnification By Advisory Corp. Advisory Corp. will indemnify and hold
harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Advisory Corp.'s failure to comply
with the terms of this Agreement or which arises out of the negligence or
willful misconduct of Advisory Corp. or its agents or contractors; provided
that such negligence or misconduct is not attributable to the Funds, their
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, the Fund shall give Advisory Corp. reasonable
opportunity to defend against said claim in its own name or in the name of such
Fund.
9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers or shareholders of both the Funds and Advisory
Corp. (including Advisory Corp.'s affiliates), and that the existence of any
such dual interest shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision of applicable
law.
<PAGE> 3
11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May 12, 1996,
and thereafter from year to year, if such continuation is specifically approved
at least annually by the Board of Trustees of each Fund, including a majority
of the independent Trustees of each Fund. This Agreement may be modified or
amended from time to time by mutual agreement between the parties hereto and
may be terminated after May 12, 1996, by at least sixty (60) days' written
notice given by one party to the others. Upon termination hereof, each Fund
shall pay to Advisory Corp. such compensation as may be due as of the date of
such termination and shall likewise reimburse Advisory Corp. for its costs,
expenses and disbursements payable under this Agreement to such date. This
Agreement may be amended in the future to include as additional parties to the
Agreement other investment companies for with Advisory Corp., any subsidiary or
affiliate serves as investment advisor or distributor if such amendment is
approved by the President of each Fund.
12. Assignment. Any interest of Advisory Corp. under this Agreement shall not
be assigned or transferred, either voluntarily or involuntarily, by operation
of law or otherwise, without the prior written consent of the Funds. This
agreement shall automatically and immediately terminate in the event of its
assignment without the prior written consent of the Funds.
13. Notice. Any notice under this Agreement shall be in writing, addressed and
delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President and that of Advisory Corp. for
this purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attention: President.
14. Personal Liability. As provided for in the Agreement and Declaration of
Trust of the various Funds, under which the Funds are organized as
unincorporated trusts, the shareholders, trustees, officers, employees and
other agents of the Fund shall not personally be found by or liable for the
matters set forth hereto, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.
15. Interpretative Provisions. In connection with the operation of this
Agreement, Advisory Corp. and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor of this
Agreement.
16. State Law. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Illinois.
17. Captions. The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
ALL OF THE PARTIES SET FORTH IN SCHEDULE A
By: /s/ Dennis J. McDonnell
---------------------------------
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /s/ Dennis J. McDonnell
---------------------------------
Dennis J. McDonnell, President
<PAGE> 5
SCHEDULE A
1. VAN KAMPEN MERRITT U.S. GOVERNMENT TRUST, on behalf of its sub-trust, Van
Kampen Merritt U.S. Government Fund
2. VAN KAMPEN MERRITT TAX FREE FUND, on behalf of its sub-trusts, Van Kampen
Merritt Insured Tax Free Income Fund, Van Kampen Merritt Tax Free High
Income Fund, Van Kampen Merritt California Insured Tax Free Fund, Van
Kampen Merritt Municipal Income Fund, Van Kampen Merritt Limited Term
Municipal Income Fund, Van Kampen Merritt New Jersey Tax Free Income Fund,
Van Kampen Merritt New York Tax Free Income Fund, Van Kampen Merritt
Florida Insured Tax Free Income Fund, Van Kampen Merritt California Tax
Free Income Fund, Van Kampen Merrit Michigan Tax Free Income Fund, Van
Kampen Merritt Missouri Tax Free Income Fund and Van Kampen Merritt Ohio
Tax Free Income Fund
3. VAN KAMPEN MERRITT TRUST, on behalf of its sub-trusts, Van Kampen Merritt
High Yield Fund, Van Kampen Merritt Short-Term Global Income Fund, Van
Kampen Merritt Adjustable Rate U.S. Government Fund, Van Kampen Merritt
Strategic Income Fund and Van Kampen Merritt Emerging Markets Income Fund
(formerly Van Kampen Merritt Global High Income Fund; formerly Van Kampen
Merritt Global Income Opportunity Fund)
4. VAN KAMPEN MERRITT EQUITY TRUST, on behalf of its sub-trusts, Van Kampen
Merritt Growth and Income Fund, Van Kampen Merritt Utility Fund and Van
Kampen Merritt Balanced Fund
5. VAN KAMPEN MERRITT PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN MERRITT MONEY MARKET TRUST, on behalf of its series, Van
Kampen Merritt Money Market Fund
7. VAN KAMPEN MERRITT TAX FREE MONEY FUND
8. VAN KAMPEN MERRITT SERIES TRUST, on behalf of its series, Quality Income
Portfolio, High Yield Portfolio, Growth and Income Portfolio, Money
Market Portfolio, Stock Index Portfolio, World Equity Portfolio and
Utility Portfolio
9. VAN KAMPEN MERRITT MUNICIPAL INCOME TRUST
10. VAN KAMPEN MERRITT CALIFORNIA MUNICIPAL TRUST
11. VAN KAMPEN MERRITT INTERMEDIATE TERM HIGH INCOME TRUST
12. VAN KAMPEN MERRITT LIMITED TERM HIGH INCOME TRUST
13. VAN KAMPEN MERRITT INVESTMENT GRADE MUNICIPAL TRUST
14. VAN KAMPEN MERRITT MUNICIPAL TRUST
15. VAN KAMPEN MERRITT CALIFORNIA QUALITY MUNICIPAL TRUST
16. VAN KAMPEN MERRITT FLORIDA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN MERRITT NEW YORK QUALITY MUNICIPAL TRUST
18. VAN KAMPEN MERRITT OHIO QUALITY MUNICIPAL TRUST
<PAGE> 6
19. VAN KAMPEN MERRITT PENNSYLVANIA QUALITY MUNICIPAL TRUST
20. VAN KAMPEN MERRITT TRUST FOR INSURED MUNICIPALS
21. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE MUNICIPALS
22. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
23. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
24. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
25. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
26. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE PENNSYLVANIA MUNICIPALS
27. VAN KAMPEN MERRITT MUNICIPAL OPPORTUNITY TRUST
28. VAN KAMPEN MERRITT ADVANTAGE MUNICIPAL INCOME TRUST
29. VAN KAMPEN MERRITT ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
30. VAN KAMPEN MERRITT STRATEGIC SECTOR MUNICIPAL TRUST
31. VAN KAMPEN MERRITT VALUE MUNICIPAL INCOME TRUST
32. VAN KAMPEN MERRITT CALIFORNIA VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN MERRITT MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
(formerly known as Van Kampen Merritt Advantage Massachusetts Municipal
Income Trust)
34. VAN KAMPEN MERRITT NEW JERSEY VALUE MUNICIPAL INCOME TRUST
(formerly known as Van Kampen Merritt Advantage New Jersey Municipal
Income Trust)
35. VAN KAMPEN MERRITT NEW YORK VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN MERRITT OHIO VALUE MUNICIPAL INCOME TRUST
(formerly known as Van Kampen Merritt Florida Value Municipal Income
Trust and Van Kampen Merritt Advantage Virginia Municipal Income Trust)
37. VAN KAMPEN MERRITT PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN MERRITT MUNICIPAL OPPORTUNITY TRUST II
39. VAN KAMPEN MERRITT FLORIDA MUNICIPAL OPPORTUNITY TRUST
(formerly known as Van Kampen Merritt Florida Value Municipal Income Trust)
40. VAN KAMPEN MERRITT ADVANTAGE MUNICIPAL INCOME TRUST II
41. VAN KAMPEN MERRITT SELECT SECTOR MUNICIPAL TRUST
<PAGE> 1
EXHIBIT (9)(b)
AMENDED AND RESTATED
LEGAL SERVICES AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, dated as of January 1, 1995, by and
between the parties as set forth in Schedule 1, attached hereto and
incorporated by reference (designated collectively hereafter as the "Funds"),
and VAN KAMPEN AMERICAN CAPITAL, INC. (formerly Van Kampen Merritt Holdings
Corp.), a Delaware corporation ("Van Kampen").
W I T N E S S E T H:
WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, Van Kampen has the capability of providing certain legal services
to the Funds; and
WHEREAS, each Fund desires to utilize Van Kampen in the provision of such
legal services; and
WHEREAS, Van Kampen intends to increase its staff in order to accommodate
the provision of all such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
spelled out herein, it is agreed between the parties hereto as follows:
1. Appointment of Van Kampen. As agent, Van Kampen shall provide each of the
Funds the legal services (the "Legal Services") as set forth in Paragraph 2 of
this Agreement. Van Kampen accepts such appointments and agrees to furnish the
Legal Services in return for the compensation provided in Paragraph 3 of this
Agreement.
2. Legal Services to be Provided. Van Kampen will provide to the Funds the
following legal services, including without limitation: accurate maintenance of
the Funds' Corporate Minute books and records, preparation and oversight of
each Fund's regulatory reports and other information provided to shareholders
as well as responding to day-to-day legal issues on behalf of the Funds. Van
Kampen shall hire persons (collectively the "Legal Services Group") as needed
to provide such Legal Services and in such numbers as may be agreed from time
to time.
3. Expenses and Reimbursement. The Legal Services expenses (the "Legal Services
Expenses") for which Van Kampen may be reimbursed are salary and salary related
benefits, including but not limited to bonuses, group insurance and other
regular wages paid to the personnel of the Legal Services Group, as well as
overhead and expenses related to office space and necessary equipment. The
Legal Services
1
<PAGE> 2
Expenses will be paid by Van Kampen and reimbursed by the Funds. Van Kampen
will tender to each Fund a monthly invoice as of the last business day of each
month which shall certify the total Legal Service Expenses expended. Except as
provided herein, Van Kampen will receive no other compensation in connection
with Legal Services rendered in accordance with this Agreement, and Van Kampen
will be responsible for all other expenses relating to the providing of Legal
Services.
4. Payment for Legal Services Expense Among the Funds. One half (50%) of the
Legal Services Expenses incurred under the Agreement shall be attributable
equally to each respective Fund and all other funds to whom Van Kampen provides
Legal Services, including all other Funds for which Van Kampen serves as
investment adviser and distributor and the Govett Funds (the Non-Participating
Funds"). Van Kampen shall assume the costs of Legal Services for the
Non-Participating Funds for which reimbursement is not received. The remaining
one half (50%) of the Legal Services Expenses shall be in allocated (a) in the
event services are attributable to specific funds (including the
Non-Participating Funds) based on such specific time allocations; and (b) in
the event services are attributable only to types of funds (i.e. closed-end and
open-end funds), the relative amount of time spent on each type of fund and
then further allocated between funds of that type on the basis of relative net
assets at the end of the period.
5. Maintenance of Records. All records maintained by Van Kampen in connection
with the performance of its duties under this Agreement will remain the
property of each respective Fund and will be preserved by Van Kampen for the
periods prescribed in Section 31 of the 1940 Act and the rules thereunder or
such other applicable rules that may be adopted from time to time under the
Act. In the event of termination of the Agreement, such records will be
promptly delivered to the respective Funds. Such records may be inspected by
the respective Funds at reasonable times.
6. Liability of Van Kampen. Van Kampen shall not be liable to any Fund for any
action taken or thing done by it or its agents or contractors on behalf of the
Fund in carrying out the terms and provisions of the Agreement if done in good
faith and without negligence or misconduct on the part of Van Kampen, its
agents or contractors.
7. Indemnification By Funds. Each Fund will indemnify and hold Van Kampen
harmless from all loss, cost, damage and expense, including reasonable expenses
for legal counsel, incurred by Van Kampen resulting from (a) any claim, demand,
action or suit in connection with Van Kampen's acceptance of this Agreement;
(b) an action or omission by Van Kampen in the performance of its duties
hereunder; (c) Van Kampen's acting upon instructions believed by it to have
been executed by a duly authorized office of the Fund; or (d) Van Kampen's
acting upon information provided by the Fund in form and under policies agreed
to by Van Kampen and the Fund. Van Kampen shall not be entitled to such
indemnification in respect of action or omissions constituting negligence or
willful misconduct of Van Kampen or its agents or contractors. Prior to
confessing any claim against it which may be subject to this indemnification,
Van
2
<PAGE> 3
Kampen shall give the Fund reasonable opportunity to defend against said claim
on its own name or in the name of Van Kampen.
8. Indemnification By Van Kampen. Van Kampen will indemnify and hold harmless
each Fund from all loss, cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Fund resulting from any claim,
demand, action or suit arising out of Van Kampen's failure to comply with the
terms of this Agreement or which arises out of the negligence or willful
misconduct of Van Kampen or its agents or contractors; provided, that such
negligence or misconduct is not attributable to the Funds, their agents or
contractors. Prior to confessing any claim against it which may be subject to
this indemnification, the Fund shall give Van Kampen reasonable opportunity to
defend against said claim in its own name or in the name of such Fund.
9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as necessary to effectuate the purposes hereof.
10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers, or shareholders of both the Funds and Van Kampen
(including Van Kampen's affiliates), and that the existence of any such dual
interest shall not affect the validity hereof or of any transactions hereunder
except as otherwise provided by a specific provision of applicable law.
11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May 31, 1996,
and thereafter from year to year if such continuation is specifically approved
at least annually by the Board of Trustees of each Fund, including a majority
of the independent Trustees of each Fund. The Agreement may be modified or
amended from time to time by mutual agreement between the and shall likewise
reimburse Van Kampen for its costs, expenses and disbursements payable under
this Agreement to such date. This Agreement may be amended in the future to
include as additional parties to the Agreement other investment companies for
which Van Kampen, any subsidiary or affiliate serves as investment advisor or
distributor.
12. Assignment. Any interest of Van Kampen under this Agreement shall not be
assigned or transferred, either voluntarily or involuntarily, by operation of
law or otherwise, without the prior written consent of the Fund. This Agreement
shall automatically and immediately terminate in the event of its assignment
without the prior written consent of the Fund.
13. Notice. Any notice under this agreement shall be in writing, addressed and
delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President
3
<PAGE> 4
and the address of Van Kampen. for this purpose is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: General Counsel.
14. Personal Liability. As provided for in the Declaration of Trust of the
various Funds, under which the Funds are organized as unincorporated trust
under the laws of the State of Delaware and Pennsylvania, as the case may be,
the shareholders, trustees, officers, employees and other agents of the Fund
shall not personally be found by or liable for the matters set forth hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.
15. Interpretative Provisions. In connection with the operation of this
agreement, Van Kampen and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their opinion be consistent with the general tenor of this Agreement.
16. State Law. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Illinois.
17. Captions. The captions in the Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction effect.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the day and year first above written.
ALL OF THE PARTIES SET FORTH IN SCHEDULE 1
ATTACHED HERETO
By: /s/ Dennis J. McDonnell
-------------------------------
Dennis J. McDonnell
President
VAN KAMPEN AMERICAN CAPITAL, INC.
By: /s/ Ronald A. Nyberg
-------------------------------
Ronald A. Nyberg
Executive Vice President
5
<PAGE> 6
SCHEDULE 1
1. VAN KAMPEN MERRITT U.S. GOVERNMENT TRUST, on behalf of its sub-trust, Van
Kampen Merritt U.S. Government Fund
2. VAN KAMPEN MERRITT TAX FREE FUND, on behalf of its sub-trust, Van Kampen
Merritt Insured Tax Free Income Fund, Van Kampen Merritt Tax Free High
Income Fund, Van Kampen Merritt California Insured Tax Free Fund, Van
Kampen Merritt Municipal Income Fund, Van Kampen Merritt Limited Term
Municipal Income Fund, Van Kampen Merritt New York Tax Free Income Fund,
Van Kampen Merritt New Jersey Tax Free Income Fund, Van Kampen Merritt
Florida Insured Tax Free Income Fund, Van Kampen Merritt California Tax
Free Income Fund, Van Kampen Merritt Michigan Tax Free Income Fund, Van
Kampen Merritt Missouri Tax Free Income Fund and Van Kampen Merritt Ohio
Tax Free Income Fund
3. VAN KAMPEN MERRITT TRUST, on behalf of its sub-trust, Van Kampen Merritt
High Yield Fund, Van Kampen Merritt Short-Term Global Income Fund, Van
Kampen Merritt Adjustable Rate U.S. Government Fund, Van Kampen Merritt
Strategic Income Fund and Van Kampen Merritt Emerging Markets Income Fund
(formerly known as Van Kampen Merritt High Income Fund; formerly known as
Van Kampen Merritt Global Income Opportunity Fund)
4. VAN KAMPEN MERRITT EQUITY TRUST, on behalf of its sub-trust, Van Kampen
Merritt Growth and Income Fund, Van Kampen Merritt Utility Fund and Van
Kampen Merritt Balanced Fund
5. VAN KAMPEN MERRITT PENNSYLVANIA TAX FREE INCOME FUND
6. VAN KAMPEN MERRITT MONEY MARKET TRUST, on behalf of its series, Van
Kampen Merritt Money Market Fund
7. VAN KAMPEN MERRITT TAX FREE MONEY FUND
8. VAN KAMPEN MERRITT SERIES TRUST, on behalf of its series, Quality Income
Portfolio, High Yield Portfolio, Growth and Income Portfolio, Money Market
Portfolio, Stock Index Portfolio, World Equity Portfolio, and Utility
Portfolio
9. VAN KAMPEN MERRITT MUNICIPAL INCOME TRUST
10. VAN KAMPEN MERRITTL CALIFORNIA MUNICIPAL TRUST
11. VAN KAMPEN MERRITT INTERMEDIATE TERM HIGH INCOME TRUST
12. VAN KAMPEN MERRITT LIMITED TERM HIGH INCOME TRUST
13. VAN KAMPEN MERRITT PRIME RATE INCOME TRUST
14. VAN KAMPEN MERRITT INVESTMENT GRADE MUNICIPAL TRUST
15. VAN KAMPEN MERRITT MUNICIPAL TRUST
16. VAN KAMPEN MERRITT CALIFORNIA QUALITY MUNICIPAL TRUST
17. VAN KAMPEN MERRITT FLORIDA QUALITY MUNICIPAL TRUST
18. VAN KAMPEN MERRITT NEW YORK QUALITY MUNICIPAL TRUST
6
<PAGE> 7
19. VAN KAMPEN MERRITT OHIO QUALITY MUNICIPAL TRUST
20. VAN KAMPEN MERRITT PENNSYLVANIA QUALITY MUNICIPAL TRUST
21. VAN KAMPEN MERRITT TRUST FOR INSURED MUNICIPALS
22. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE MUNICIPALS
23. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE CALIFORNIA MUNICIPALS
24. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE FLORIDA MUNICIPALS
25. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE NEW JERSEY MUNICIPALS
26. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE NEW YORK MUNICIPALS
27. VAN KAMPEN MERRITT TRUST FOR INVESTMENT GRADE PENNSYLVANIA MUNICIPALS
28. VAN KAMPEN MERRITT MUNICIPAL OPPORTUNITY TRUST
29. VAN KAMPEN MERRITT ADVANTAGE MUNICIPAL INCOME TRUST
30. VAN KAMPEN MERRITT ADVANTAGE PENNSYLVANIA MUNICIPAL INCOME TRUST
31. VAN KAMPEN MERRITT STRATEGIC SECTOR MUNICIPAL TRUST
32. VAN KAMPEN MERRITT VALUE MUNICIPAL INCOME TRUST
33. VAN KAMPEN MERRITT CALIFORNIA VALUE MUNICIPAL INCOME TRUST
34. VAN KAMPEN MERRITT MASSACHUSETTS VALUE MUNICIPAL INCOME TRUST
35. VAN KAMPEN MERRITT NEW JERSEY VALUE MUNICIPAL INCOME TRUST
36. VAN KAMPEN MERRITT NEW YORK VALUE MUNICIPAL INCOME TRUST
37. VAN KAMPEN MERRITT OHIO VALUE MUNICIPAL INCOME TRUST
38. VAN KAMPEN MERRITT PENNSYLVANIA VALUE MUNICIPAL INCOME TRUST
39. VAN KAMPEN MERRITT MUNICIPAL OPPORTUNITY TRUST II
40. VAN KAMPEN MERRITT FLORIDA MUNICIPAL OPPORTUNITY TRUST
41. VAN KAMPEN MERRITT ADVANTAGE MUNICIPAL INCOME TRUST II
42. VAN KAMPEN MERRITT SELECT SECTOR MUNICIPAL TRUST
7
<PAGE> 1
EXHIBIT 11(i)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(ii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Tax Free High Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(iii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital California Insured Tax Free Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(iv)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(v)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Intermediate Term Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(vi)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Florida Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(vii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital New Jersey Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 11(viii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital New York Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
April 23, 1996
<PAGE> 1
EXHIBIT 15(a)(i)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL INSURED
TAX FREE INCOME FUND (the "Fund"), a series of the Van Kampen American Capital
Tax Free Trust (the "Trust"). This Distribution Plan describes the material
terms and conditions under which assets of the Fund may be used in connection
with financing distribution related activities with respect to each of its
classes of shares of beneficial interest (the "Shares"), each of which is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and
the maintenance of shareholder accounts of all classes of Shares, including
paying interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in
effect, subject to applicable laws and regulations. Reimbursements for
distribution related expenses payable hereunder with respect to a particular
class of Shares may not be used to subsidize the sale of Shares of any other
class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority of
the Disinterested Trustees. Amendments required to conform this Distribution
Plan to changes in the Rule or to other changes in the 1940 Act or the rules
and regulations thereunder shall not be deemed to be material amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15(a)(ii)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL TAX
FREE HIGH INCOME FUND (the "Fund"), a series of the Van Kampen American Capital
Tax Free Trust (the "Trust"). This Distribution Plan describes the material
terms and conditions under which assets of the Fund may be used in connection
with financing distribution related activities with respect to each of its
classes of shares of beneficial interest (the "Shares"), each of which is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and the
maintenance of shareholder accounts of all classes of Shares, including
paying interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority of
the Disinterested Trustees. Amendments required to conform this Distribution
Plan to changes in the Rule or to other changes in the 1940 Act or the rules
and regulations thereunder shall not be deemed to be material amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15 (a)(iii)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND (the "Fund"), a series of the Van Kampen
American Capital Tax Free Trust (the "Trust"). This Distribution Plan
describes the material terms and conditions under which assets of the Fund may
be used in connection with financing distribution related activities with
respect to each of its classes of shares of beneficial interest (the "Shares"),
each of which is offered and sold subject to a different combination of
front-end sales charges, distribution fees, service fees and contingent
deferred sales charges.(1) Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"Front-End Classes" and the Shares of such classes are referred to herein as
"Front-End Shares." Classes of shares, if any, subject to a
contingent-deferred sales charge and a distribution and/or a service fee are
referred to herein as "CDSC Classes" and Shares of such classes are referred to
herein as "CDSC Shares." Classes of shares, if any, subject to a front-end
sales charge, a contingent-deferred sales charge and a distribution and/or
service fee are referred to herein as "Combination Classes" and Shares of such
class are referred to herein as "Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and the
maintenance of shareholder accounts of all classes of Shares, including paying
interest on and incurring other carrying costs on funds borrowed to pay such
initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority
of the Disinterested Trustees. Amendments required to conform this
Distribution Plan to changes in the Rule or to other changes in the 1940 Act or
the rules and regulations thereunder shall not be deemed to be material
amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15 (a)(iv)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND (the "Fund"), a series of the Van Kampen American Capital
Tax Free Trust (the "Trust"). This Distribution Plan describes the material
terms and conditions under which assets of the Fund may be used in connection
with financing distribution related activities with respect to each of its
classes of shares of beneficial interest (the "Shares"), each of which is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and the
maintenance of shareholder accounts of all classes of Shares, including paying
interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority of
the Disinterested Trustees. Amendments required to conform this Distribution
Plan to changes in the Rule or to other changes in the 1940 Act or the rules
and regulations thereunder shall not be deemed to be material amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15 (a)(v)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL LIMITED TERM MUNICIPAL INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL LIMITED
TERM MUNICIPAL INCOME FUND (the "Fund"), a series of the Van Kampen American
Capital Tax Free Trust (the "Trust"). This Distribution Plan describes the
material terms and conditions under which assets of the Fund may be used in
connection with financing distribution related activities with respect to each
of its classes of shares of beneficial interest (the "Shares"), each of which
is offered and sold subject to a different combination of front-end sales
charges, distribution fees, service fees and contingent deferred sales
charges.(1) Classes of shares, if any, subject to a front-end sales charge and
a distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and
the maintenance of shareholder accounts of all classes of Shares, including
paying interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such class, there
is no carryforward of reimbursement obligations to succeeding years. In the
event the amounts payable hereunder with respect to a shares of a CDSC Class or
a Combination Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of the respective
class, such unreimbursed distribution expenses will be carried forward and paid
by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority
of the Disinterested Trustees. Amendments required to conform this
Distribution Plan to changes in the Rule or to other changes in the 1940 Act or
the rules and regulations thereunder shall not be deemed to be material
amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
Exhibit 15(a)(vi)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL FLORIDA
INSURED TAX FREE INCOME FUND (the "Fund"), a series of the Van Kampen American
Capital Tax Free Trust (the "Trust"). This Distribution Plan describes the
material terms and conditions under which assets of the Fund may be used in
connection with financing distribution related activities with respect to each
of its classes of shares of beneficial interest (the "Shares"), each of which
is offered and sold subject to a different combination of front-end sales
charges, distribution fees, service fees and contingent deferred sales
charges.(1) Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and the
maintenance of shareholder accounts of all classes of Shares, including paying
interest on and incurring other carrying costs on funds borrowed to pay such
initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority
of the Disinterested Trustees. Amendments required to conform this
Distribution Plan to changes in the Rule or to other changes in the 1940 Act or
the rules and regulations thereunder shall not be deemed to be material
amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15(a)(vii)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL NEW
JERSEY TAX FREE INCOME FUND (the "Fund"), a series of the Van Kampen American
Capital Tax Free Trust (the "Trust"). This Distribution Plan describes the
material terms and conditions under which assets of the Fund may be used in
connection with financing distribution related activities with respect to each
of its classes of shares of beneficial interest (the "Shares"), each of which
is offered and sold subject to a different combination of front-end sales
charges, distribution fees, service fees and contingent deferred sales
charges.(1) Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and
the maintenance of shareholder accounts of all classes of Shares, including
paying interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in
effect, subject to applicable laws and regulations. Reimbursements for
distribution related expenses payable hereunder with respect to a particular
class of Shares may not be used to subsidize the sale of Shares of any other
class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority
of the Disinterested Trustees. Amendments required to conform this
Distribution Plan to changes in the Rule or to other changes in the 1940 Act or
the rules and regulations thereunder shall not be deemed to be material
amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15(a)(viii)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL NEW YORK
TAX FREE INCOME FUND (the "Fund"), a series of the Van Kampen American Capital
Tax Free Trust (the "Trust"). This Distribution Plan describes the material
terms and conditions under which assets of the Fund may be used in connection
with financing distribution related activities with respect to each of its
classes of shares of beneficial interest (the "Shares"), each of which is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to which
the Fund is authorized to expend on an annual basis a portion of its average
net assets attributable to any or each class of Shares in connection with the
provision by the principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
The Fund hereby is authorized to pay the Distributor a distribution fee
with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and
- ---------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to an
order of the Securities and Exchange Commission exempting the Fund from
certain provisions of the 1940 Act.
1
<PAGE> 2
Combination Shares and (ii) providing personal services to shareholders and the
maintenance of shareholder accounts of all classes of Shares, including
paying interest on and incurring other carrying costs on funds borrowed to pay
such initial outlays; and (f) acting as agent for the Fund in connection with
implementing this Distribution Plan pursuant to the Selling Agreements.
The amount of the distribution fee hereby authorized with respect to each
class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.25% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.25% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
With respect to Class B Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
With respect to Class C Shares, the distribution fee authorized hereby and
the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 1.00% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made more often
than monthly upon receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses qualifying for such
reimbursement allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to shares of a
Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such
class, there is no carryforward of reimbursement obligations to succeeding
years. In the event the amounts payable hereunder with respect to a shares of
a CDSC Class or a Combination Class do not fully reimburse the Distributor for
its actual distribution related expenses with respect to the Shares of the
respective class, such unreimbursed distribution expenses will be carried
forward and paid by the Fund
2
<PAGE> 3
hereunder in future years so long as this Distribution Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for distribution
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize the sale of Shares of any other class of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Distribution Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Distribution Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting
3
<PAGE> 4
securities" of the respective class of Shares of the Fund and may not be
amended in any other material respect except with the approval of a majority of
the Disinterested Trustees. Amendments required to conform this Distribution
Plan to changes in the Rule or to other changes in the 1940 Act or the rules
and regulations thereunder shall not be deemed to be material amendments.
To the extent any service fees paid by the Fund pursuant to the Service
Plan are deemed to be payments for the financing of any activity primarily
intended to result in the sale of Shares issued by the Fund within the meaning
of the Rule, the terms and provisions of such plan and any payments made
pursuant to such plan hereby are authorized pursuant to this Distribution Plan
in the amounts and for the purposes authorized in the Service Plan without any
further action by the Board of Trustees or the shareholders of the Fund. To
the extent the terms and provisions of the Service Plan conflict with the terms
and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan as trustees
under the Declaration of Trust of the Trust and the policies of the Trust
adopted hereby are not binding upon any of the Trustees or shareholders of the
Trust individually, but bind only the trust estate.
4
<PAGE> 1
EXHIBIT 15(d)(i)
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL INSURED TAX FREE INCOME FUND (the "Fund"), a series of the Van
Kampen American Capital Tax Free Trust (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used to compensate
the Fund's principal underwriter, within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(ii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE HIGH INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL TAX FREE HIGH INCOME FUND (the "Fund"), a series of the Van
Kampen American Capital Tax Free Trust (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used to compensate
the Fund's principal underwriter, within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(iii)
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND (the "Fund"), a series of the
Van Kampen American Capital Tax Free Trust (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used to compensate
the Fund's principal underwriter, within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(iv)
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL MUNICIPAL INCOME FUND (the "Fund"), a series of the Van Kampen
American Capital Tax Free Trust (the "Trust") describes the material terms and
conditions under which assets of the Fund may be used to compensate the Fund's
principal underwriter, within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(v)
VAN KAMPEN AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL INTERMEDIATE TERM MUNICIPAL INCOME FUND (the "Fund"), a series
of the Van Kampen American Capital Tax Free Trust (the "Trust") describes the
material terms and conditions under which assets of the Fund may be used to
compensate the Fund's principal underwriter, within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"), brokers, dealers
and other financial intermediaries (collectively "Financial Intermediaries")
for providing personal services to shareholders and/or the maintenance of
shareholder accounts with respect to each of its Class A Shares of beneficial
interest (the "Class A Shares"), its Class B Shares of beneficial interest (the
"Class B Shares"), and its Class C Shares of beneficial interest (the "Class C
Shares"). The Class A Shares, Class B Shares and Class C Shares sometimes are
referred to herein collectively as the "Shares." Each class of Shares is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(vi)
VAN KAMPEN AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL FLORIDA INSURED TAX FREE INCOME FUND (the "Fund"), a series of
the Van Kampen American Capital Tax Free Trust (the "Trust") describes the
material terms and conditions under which assets of the Fund may be used to
compensate the Fund's principal underwriter, within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act"), brokers, dealers
and other financial intermediaries (collectively "Financial Intermediaries")
for providing personal services to shareholders and/or the maintenance of
shareholder accounts with respect to each of its Class A Shares of beneficial
interest (the "Class A Shares"), its Class B Shares of beneficial interest (the
"Class B Shares"), and its Class C Shares of beneficial interest (the "Class C
Shares"). The Class A Shares, Class B Shares and Class C Shares sometimes are
referred to herein collectively as the "Shares." Each class of Shares is
offered and sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.(1)
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(vii)
VAN KAMPEN AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL NEW JERSEY TAX FREE INCOME FUND (the "Fund"), a series of the
Van Kampen American Capital Tax Free Trust (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used to compensate
the Fund's principal underwriter, within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 15(d)(viii)
VAN KAMPEN AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL NEW YORK TAX FREE INCOME FUND (the "Fund"), a series of the
Van Kampen American Capital Tax Free Trust (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used to compensate
the Fund's principal underwriter, within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares"). The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.(1) Classes of shares, if
any, subject to a front-end sales charge and a distribution and/or service fee
are referred to herein as "Front-End Classes" and the Shares of such classes
are referred to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares of such classes
are referred to herein as "CDSC Shares." Classes of shares, if any, subject to
a front-end sales charge, a contingent-deferred sales charge and a distribution
and/or service fee are referred to herein as "Combination Classes" and Shares
of such class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (formerly Van
Kampen Merritt, Inc.) (the "Distributor"), pursuant to which the Distributor
acts as agent on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with respect to each
class of Shares. The Distributor may enter into selling agreements (the
"Selling Agreements") with brokers, dealers and other financial intermediaries
("Financial Intermediaries") in order to implement the Distribution Agreement,
the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.25% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.25% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
- --------------------
(1) The Fund is authorized to offer multiple classes of shares pursuant to
an order of the Securities and Exchange Commission exempting the Fund
from certain provisions of the 1940 Act.
1
<PAGE> 2
Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class
of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
The Fund shall not compensate the Distributor, and neither the Fund nor
the Distributor shall compensate any Financial Intermediary, for any service
related expenses incurred with respect to a class of Shares prior to the later
of (a) the implementation of this Service Plan with respect to such class of
Shares or (b) the date that such Financial Intermediary enters into a Selling
Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to such
Financial Intermediaries for activities and services of the type referred to in
Paragraph 1 hereof. Prior to the implementation of a Selling Agreement, such
agreement shall be approved by a majority of the Board of Trustees of the Trust
and a majority of the Disinterested Trustees (within the meaning of the 1940
Act) by a vote cast in person at a meeting called for the purpose of voting on
such Selling Agreements. Such Selling Agreements shall provide that the
Financial Intermediaries shall provide the Distributor with such information
as is reasonably necessary to permit the Distributor to comply with the
reporting requirements set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund is hereby
authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written reports for
each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at a
meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
This Service Plan and any agreement contemplated hereby shall continue in
effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
This Service Plan may not be amended to increase materially the maximum
amounts permitted to be expended hereunder except with the approval of a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the Investment Company Act of 1940, as amended (the "1940 Act"), the 1940 Act,
the rules and regulations thereunder or the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. shall not be deemed to be
material amendments.
The Trustees of the Trust have adopted this Service Plan as trustees under
the Declaration of Trust of the Trust and the policies of the Trust adopted
hereby are not binding upon any of the Trustees or shareholders of the Trust
individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 16(a)(i)
INSURED TAX FREE INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$5,830,256.08 - $1,070,845.00 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.07%
68,965,222.950 X $20.52 -----
Class A Shares $5,830,256.08 - $1,072,222.22 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 4.07%
Expense Waiver 68,965,222.950 X $20.52 -----
Waived Expense Adjustment (4.07%-4.07%) 0.00%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.07%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.07% .19%
- Expense Differential between Class A Shares and Class B Shares .78%
-----
Class B Share SEC Yield 3.48%
=====
- Waived Expense Adjustment .00%
-----
Class B Share SEC Yield (Without Expense Waiver) 3.48%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.07%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.07% .19%
- Expense Differential between Class A Shares and Class C Shares .78%
-----
Class C Share SEC Yield 3.48%
=====
- Waived Expense Adjustment .00%
-----
Class C Share SEC Yield (Without Expense Waiver) 3.48%
=====
<PAGE> 2
INSURED TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Current Annual Income Per Share
Current Offering Price
Formula SEC Yield
------------
1 - Tax Rate
Class A Shares
4.07%
------
1-36% = 6.36%
Class B Shares
3.48%
-------
1-36% = 5.44%
Class C Shares
3.48%
------
1-36% = 5.44%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.00%
------
1-36% = 7.81%
Class B Shares
4.51%
-------
1-36% = 7.05%
Class C Shares
4.51%
------
1-36% = 7.05%
<PAGE> 3
INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$1.026
------
$20.52 = 5.00%
Class B Shares
$ 0.882
-------
$ 19.55 = 4.51%
Class C Shares
$0.882
------
$19.55 = 4.51%
<PAGE> 4
INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $2,450.20 = P
Ending Redeemable Value $2,742.12 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 11.91% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $2,333.82 = P
Ending Redeemable Value $2,742.12 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 17.49% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,921.97 = P
Ending Redeemable Value $2,742.12 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 7.37% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,830.68 = P
Ending Redeemable Value $2,742.12 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 8.42% = T
<PAGE> 5
INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,226.29 = P
Ending Redeemable Value $2,742.12 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 8.38% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,168.04 = P
Ending Redeemable Value $2,742.12 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 8.91% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,742.12 = ERV
n
Inception through 12/31/95 = (132 Mos.) 11 =
TOTAL RETURN FOR THE PERIOD 9.60% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $952.67 = P
Ending Redeemable Value $2,742.12 = ERV
n
Inception through 12/31/95 = (132 Mos.) 11 =
TOTAL RETURN FOR THE PERIOD 10.09% = T
<PAGE> 6
INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,742.12 = ERV
TOTAL RETURN FOR THE PERIOD 174.21% = T
Excluding Payment of the Sales Charge
Net Asset Value $19.55
Initial Investment $952.67 = P
Ending Redeemable Value $2,742.12 = ERV
TOTAL RETURN FOR THE PERIOD 187.84% = T
<PAGE> 7
INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $984.67 = P
Ending Redeemable Value $1,109.43 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 12.67% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $984.67 = P
Ending Redeemable Value $1,148.82 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 16.67% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.82 = ERV
n
Inception through 12/31/95 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 4.13% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,148.82 = ERV
n
Inception through 12/31/95 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 5.34% = T
<PAGE> 8
INSURED TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.82 = ERV
TOTAL RETURN FOR THE PERIOD 11.38% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,148.82 = ERV
TOTAL RETURN FOR THE PERIOD 14.88% = T
<PAGE> 9
INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $955.31 = P
Ending Redeemable Value $1,104.37 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 15.60% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $955.31 = P
Ending Redeemable Value $1,113.92 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 16.60% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.92 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 4.57% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.92 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 4.57% = T
<PAGE> 10
INSURED TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.92 = ERV
TOTAL RETURN FOR THE PERIOD 11.39% = T
Excluding Payment of the CDSC
Net Asset Value $19.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,113.92 = ERV
TOTAL RETURN FOR THE PERIOD 11.39% = T
<PAGE> 1
EXHIBIT 16(a)(ii)
TAX FREE HIGH INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$3,224,274.88 - $530,540.28 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.85%
42,806,897.651 X $15.73 -----
Class A Shares $3,224,274.88 - $531,735.20 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 4.85%
Expense Waiver 42,806,897.651 X $15.73 -----
Waived Expense Adjustment (4.85%-4.85%) 0.00%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.85%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.85% .23%
- Expense Differential between Class A Shares and Class B Shares .78%
-----
Class B Share SEC Yield 4.30%
=====
- Waived Expense Adjustment 0.00%
-----
Class B Share SEC Yield (Without Expense Waiver) 4.30%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.85%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.85% .23%
- Expense Differential between Class A Shares and Class C Shares .78%
-----
Class C Share SEC Yield 4.30%
=====
- Waived Expense Adjustment 0.00%
-----
Class C Share SEC Yield (Without Expense Waiver) 4.30%
=====
<PAGE> 2
TAX FREE HIGH INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$.960
------
$15.73 = 6.10%
Class B Shares
$ .846
------
$14.98 = 5.65%
Class C Shares
$ .846
------
$14.99 = 5.64%
<PAGE> 3
TAX FREE HIGH INCOME FUND
Calculation of Taxable Equivalent SEC Yield
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.85%
-----
1-36% = 7.58%
Class B Shares
4.30%
-----
1-36% = 6.72%
Class C Shares
4.30%
-----
1-36% = 6.72%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
6.10%
-----
1-36% = 9.53%
Class B Shares
5.65%
-----
1-36% = 8.83%
Class C Shares
5.64%
-----
1-36% = 8.81%
<PAGE> 4
TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $2,030.98 = P
Ending Redeemable Value $2,234.70 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 10.03% = T
Excluding Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,934.51 = P
Ending Redeemable Value $2,234.70 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 15.52% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,698.38 = P
Ending Redeemable Value $2,234.70 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 5.64% = T
Excluding Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,617.71 = P
Ending Redeemable Value $2,234.70 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 6.68% = T
<PAGE> 5
TAX FREE HIGH INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,083.45 = P
Ending Redeemable Value $2,234.70 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 7.51% = T
Excluding Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,031.99 = P
Ending Redeemable Value $2,234.70 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 8.03% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,234.70 = ERV
n
Inception through 12/31/95 = (126 Mos.) 10.50 =
TOTAL RETURN FOR THE PERIOD 7.96% = T
Excluding Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $952.67 = P
Ending Redeemable Value $2,234.70 = ERV
n
Inception through 12/31/95 = (126 Mos.) 10.50 =
TOTAL RETURN FOR THE PERIOD 8.46% = T
<PAGE> 6
TAX FREE HIGH INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,234.70 = ERV
TOTAL RETURN FOR THE PERIOD 123.47% = T
Excluding Payment of the Sales Charge
Net Asset Value $14.98
Initial Investment $952.67 = P
Ending Redeemable Value $2,234.70 = ERV
TOTAL RETURN FOR THE PERIOD 134.57% = T
<PAGE> 7
TAX FREE HIGH INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,047.98 = P
Ending Redeemable Value $1,159.31 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 10.62% = T
Excluding Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,047.98 = P
Ending Redeemable Value $1,201.23 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.62% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,166.23 = ERV
n
Inception through 12/31/95 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 5.94% = T
Excluding Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,201.23 = ERV
n
Inception through 12/31/94 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 7.12% = T
<PAGE> 8
TAX FREE HIGH INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,166.23 = ERV
TOTAL RETURN FOR THE PERIOD 16.62% = T
Excluding Payment of the CDSC
Net Asset Value $14.98
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,201.23 = ERV
TOTAL RETURN FOR THE PERIOD 20.12% = T
<PAGE> 9
TAX FREE HIGH INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,003.89 = P
Ending Redeemable Value $1,141.39 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 13.70% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,003.89 = P
Ending Redeemable Value $1,151.43 = ERV
n
One year period ended 12/31/94 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.70% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,151.43 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 6.01% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,151.43 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 6.01% = T
<PAGE> 10
TAX FREE HIGH INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,151.43 = ERV
TOTAL RETURN FOR THE PERIOD 15.14% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,151.43 = ERV
TOTAL RETURN FOR THE PERIOD 15.14% = T
<PAGE> 1
EXHIBIT 16(a)(iii)
CALIFORNIA INSURED TAX FREE FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$629,276.61 - $114,284.36 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.12%
8,255,055.680 X $18.34 -----
Class A Shares $629,276.61 - $131,540.06 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 3.98%
Expense Waiver 8,255,055.680 X $18.34 -----
Waived Expense Adjustment (4.12%-3.98%) 0.14%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.12%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
3.25% x 4.12% .13%
- Expense Differential between Class A Shares and Class B Shares .76%
-----
Class B Share SEC Yield 3.49%
=====
- Waived Expense Adjustment .14%
-----
Class B Share SEC Yield (Without Expense Waiver) 3.35%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.12%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
3.25% x 4.12% .13%
- Expense Differential between Class A Shares and Class C Shares .76%
-----
Class C Share SEC Yield 3.49%
=====
- Waived Expense Adjustment .14%
-----
Class C Share SEC Yield (Without Expense Waiver) 3.35%
=====
<PAGE> 2
CALIFORNIA INSURED TAX FREE FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$0.888
------
$18.34 = 4.84%
Class B Shares
$ 0.761
-------
$ 17.74 = 4.29%
Class C Shares
$0.761
------
$17.74 = 4.29%
<PAGE> 3
CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,939.47 = P
Ending Redeemable Value $2,219.52 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.44% = T
Excluding Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,876.44 = P
Ending Redeemable Value $2,219.52 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 18.28% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,531.84 = P
Ending Redeemable Value $2,219.52 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 7.70% = T
Excluding Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,482.06 = P
Ending Redeemable Value $2,219.52 = ERV
n
Five years ended 12/31/95 = (60 Mos.) 5 =
TOTAL RETURN FOR THE PERIOD 8.41% = T
<PAGE> 4
CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,011.90 = P
Ending Redeemable Value $2,219.52 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 8.17% = T
Excluding Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $979.01 = P
Ending Redeemable Value $2,219.52 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 10 =
TOTAL RETURN FOR THE PERIOD 8.53% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,219.52 = ERV
n
Inception through 12/31/95 = (121 Mos.) 10.08333 =
TOTAL RETURN FOR THE PERIOD 8.23% = T
Excluding Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $967.50 = P
Ending Redeemable Value $2,219.52 = ERV
n
Inception through 12/31/95 = (121 Mos.) 10.08333 =
TOTAL RETURN FOR THE PERIOD 8.58% = T
<PAGE> 5
CALIFORNIA INSURED TAX FREE FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,219.52 = ERV
TOTAL RETURN FOR THE PERIOD 121.95% = T
Excluding Payment of the Sales Charge
Net Asset Value $17.74
Initial Investment $967.50 = P
Ending Redeemable Value $2,219.52 = ERV
TOTAL RETURN FOR THE PERIOD 129.41% = T
<PAGE> 6
CALIFORNIA INSURED TAX FREE FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $971.73 = P
Ending Redeemable Value $1,111.02 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.33% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $971.73 = P
Ending Redeemable Value $1,140.17 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 17.33% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.17 = ERV
n
Inception through 12/31/95 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 4.35% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,140.17 = ERV
n
Inception through 12/31/95 = (32 Mos.) 2.66667 =
TOTAL RETURN FOR THE PERIOD 5.04% = T
<PAGE> 7
CALIFORNIA INSURED TAX FREE FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.17 = ERV
TOTAL RETURN FOR THE PERIOD 12.02% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,140.17 = ERV
TOTAL RETURN FOR THE PERIOD 14.02% = T
<PAGE> 8
CALIFORNIA INSURED TAX FREE FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $934.76 = P
Ending Redeemable Value $1,088.08 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 16.40% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $934.76 = P
Ending Redeemable Value $1,097.43 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 17.40% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,097.43 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 3.92% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,097.43 = ERV
n
Inception through 12/31/95 = (29 Mos.) 2.41667 =
TOTAL RETURN FOR THE PERIOD 3.92% = T
<PAGE> 9
CALIFORNIA INSURED TAX FREE FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,097.43 = ERV
TOTAL RETURN FOR THE PERIOD 9.74% = T
Excluding Payment of the CDSC
Net Asset Value $17.74
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,097.43 = ERV
TOTAL RETURN FOR THE PERIOD 9.74% = T
<PAGE> 1
EXHIBIT 16(a)(iv)
MUNICIPAL INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
_ _
Formula | Total Income - Total Expenses 6 |
| (((( ---------------------- --- -------------------- ) + 1 ) ) - 1 ) * 2 | = SEC Yield
Class A Shares |_ Average Dividend Shares x Public Offering Price _| ---------
_ _
| $4,003,197.67 - $702,585.68 6 |
Class A Shares | (((( ---------------------- --- -------------------- ) + 1 ) ) - 1 ) * 2 | = 4.61%
|_ 53,163,540.286 x $16.33 _| -----
_ _
| $4,003,197.67 - $703,728.47 6 |
Class A Shares | (((( ---------------------- --- -------------------- ) + 1 ) ) - 1 ) * 2 | = 4.60%
|_ 53,163,540.286 x $16.33 _| -----
Waived Expense Adjustment (4.61%-4.60%) 0.01%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.61%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.61% .22%
-Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 4.08%
=====
-Waived Expense Adjustment 0.01%
-----
Class B Share SEC Yield (Without Expense Waiver) 4.07%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.61%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.61% .22%
-Expense Differential between Class A Shares and Class C Shares .75%
-----
Class C Share SEC Yield 4.08%
=====
-Waived Expense Adjustment 0.01%
-----
Class B Share SEC Yield (Without Expense Waiver) 4.07%
=====
<PAGE> 2
MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
---------------------------------
Current Offering Price
Class A Shares
$.882
-------
$16.33 = 5.40%
Class B Shares
$.768
--------
$15.55 = 4.94%
Class C Shares
$.768
--------
$15.55 = 4.94%
<PAGE> 3
MUNICIPAL INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
-----------------
1 - Tax Rate
Class A Shares
4.61%
--------
1-36% = 7.20%
Class B Shares
4.08%
--------
1-36% = 6.38%
Class C Shares
4.08%
--------
1-36% = 6.38%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-------------------------
1 - Tax Rate
Class A Shares
5.40%
--------
1-36% = 8.44%
Class B Shares
4.94%
--------
1-36% = 7.72%
Class C Shares
4.94%
--------
1-36% = 7.72%
<PAGE> 4
MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,347.22 = P
Ending Redeemable Value $1,483.55 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD (10.12%) = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,283.23 = P
Ending Redeemable Value $1,483.55 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 15.61% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,025.80 = P
Ending Redeemable Value $1,483.55 = ERV
Five years ended 12/31/95 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 7.66% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $977.07 = P
Ending Redeemable Value $1,483.55 = ERV
Five years ended 12/31/95 = (60 Mos.) 5 = n
TOTAL RETURN FOR THE PERIOD 8.71% = T
</TABLE>
<PAGE> 5
MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,483.55 = ERV
Inception through 12/31/95 = (65 Mos.) 5.41667 = n
TOTAL RETURN FOR THE PERIOD 7.55% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $952.57 = P
Ending Redeemable Value $1,483.55 = ERV
Inception through 12/31/95 = (65 Mos.) 5.41667 = n
TOTAL RETURN FOR THE PERIOD 8.52% = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,483.55 = ERV
TOTAL RETURN FOR THE PERIOD 48.36% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.55
Initial Investment $952.57 = P
Ending Redeemable Value $1,483.55 = ERV
TOTAL RETURN FOR THE PERIOD 55.74% = T
</TABLE>
<PAGE> 6
MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,055.47 = P
Ending Redeemable Value $1,168.86 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 10.74% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,055.47 = P
Ending Redeemable Value $1,211.08 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 14.74% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,186.08 = ERV
Inception through 12/31/95 = (41 Mos.) 3.41667 = n
TOTAL RETURN FOR THE PERIOD 5.12% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,211.08 = ERV
Inception through 12/31/95 = (41 Mos.) 3.41667 = n
TOTAL RETURN FOR THE PERIOD 5.77% = T
</TABLE>
<PAGE> 7
MUNICIPAL INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,186.08 = ERV
TOTAL RETURN FOR THE PERIOD 18.61% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,211.08 = ERV
TOTAL RETURN FOR THE PERIOD 21.11% = T
<PAGE> 8
MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $957.84 = P
Ending Redeemable Value $1,089.48 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 13.74% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $957.84 = P
Ending Redeemable Value $1,099.06 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 14.74% = T
</TABLE>
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.06 = ERV
Inception through 12/31/95 = (29 Mos.) 2.41667 = n
TOTAL RETURN FOR THE PERIOD 3.99% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.06 = ERV
Inception through 12/31/95 = (29 Mos.) 2.41667 = n
TOTAL RETURN FOR THE PERIOD 3.99% = T
</TABLE>
<PAGE> 9
MUNICIPAL INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
<TABLE>
<S> <C> <C> <C>
Formula ERV - P
---------
P = T
Including Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.06 = ERV
TOTAL RETURN FOR THE PERIOD 9.91% = T
Excluding Payment of the CDSC
Net Asset Value $15.55
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.06 = ERV
TOTAL RETURN FOR THE PERIOD 9.91% = T
</TABLE>
<PAGE> 1
EXHIBIT 16(a)(v)
LIMITED TERM MUNICIPAL INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$68,315.93 - $13,103.50 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.14%
1,524,158.410 X $10.60 -----
Class A Shares $68,315.93 - $22,027.00 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 3.46%
Expense Waiver 1,524,158.410 X $10.60 -----
Waived Expense Adjustment (4.14%-3.46%) 0.68%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.14%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
3.25% x 4.14% .13%
- Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 3.52%
=====
- Waived Expense Adjustment .68%
-----
Class B Share SEC Yield (Without Expense Waiver) 2.84%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.14%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
3.25% x 4.14% .13%
- Expense Differential between Class A Shares and Class C Shares .75%
-----
Class C Share SEC Yield 3.52%
=====
- Waived Expense Adjustment .68%
-----
Class C Share SEC Yield (Without Expense Waiver) 2.84%
=====
<PAGE> 2
LIMITED TERM MUNICIPAL INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$ .474
------
$10.60 = 4.47%
Class B Shares
$ .402
-------
$ 10.26 = 3.92%
Class C Shares
$ .402
------
$10.26 = 3.92%
<PAGE> 3
LIMITED TERM MUNICIPAL INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula SEC Yield
------------
1 - Tax Rate
Class A Shares
4.14%
------
1-36% = 6.47%
Class B Shares
3.52%
-------
1-36% = 5.50%
Class C Shares
3.52%
------
1-36% = 5.50%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.47%
------
1-36% = 6.98%
Class B Shares
3.92%
-------
1-36% = 6.13%
Class C Shares
3.92%
------
1-36% = 6.13%
<PAGE> 4
LIMITED TERM MUNICIPAL INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $1,041.39 = P
Ending Redeemable Value $1,161.83 = ERV
n
Ten years ended 12/31/95 = (120 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 11.57% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $1,007.54 = P
Ending Redeemable Value $1,161.83 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 15.31% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,161.83 = ERV
n
Inception through 12/31/95 = (31 Mos.) 2.58333 =
TOTAL RETURN FOR THE PERIOD 5.98% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $967.19 = P
Ending Redeemable Value $1,161.83 = ERV
n
Inception through 12/31/95 = (31 Mos.) 2.58333 =
TOTAL RETURN FOR THE PERIOD 7.36% = T
<PAGE> 5
LIMITED TERM MUNICIPAL INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,161.83 = ERV
TOTAL RETURN FOR THE PERIOD 16.18% = T
Excluding Payment of the Sales Charge
Net Asset Value $10.26
Initial Investment $967.10 = P
Ending Redeemable Value $1,161.83 = ERV
TOTAL RETURN FOR THE PERIOD 20.14% = T
<PAGE> 6
LIMITED TERM MUNICIPAL INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,029.04 = P
Ending Redeemable Value $1,148.57 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 11.62% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,029.04 = P
Ending Redeemable Value $1,179.44 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.62% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,159.44 = ERV
n
Inception through 12/31/95 = (31 Mos.) 2.58333 =
TOTAL RETURN FOR THE PERIOD 5.89% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,179.44 = ERV
n
Inception through 12/31/95 = (31 Mos.) 2.58333 =
TOTAL RETURN FOR THE PERIOD 6.60% = T
<PAGE> 7
LIMITED TERM MUNICIPAL INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,159.44 = ERV
TOTAL RETURN FOR THE PERIOD 15.94% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,179.44 = ERV
TOTAL RETURN FOR THE PERIOD 17.94% = T
<PAGE> 8
LIMITED TERM MUNICIPAL INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $958.66 = P
Ending Redeemable Value $1,090.35 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 13.74% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $958.66 = P
Ending Redeemable Value $1,099.94 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.74% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.94 = ERV
n
Inception through 12/31/95 = (27 Mos.) 2.25 =
TOTAL RETURN FOR THE PERIOD 4.32% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.94 = ERV
n
Inception through 12/31/95 = (27 Mos.) 2.25 =
TOTAL RETURN FOR THE PERIOD 4.32% = T
<PAGE> 9
LIMITED TERM MUNICIPAL INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.94 = ERV
TOTAL RETURN FOR THE PERIOD 9.99% = T
Excluding Payment of the CDSC
Net Asset Value $10.26
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,099.94 = ERV
TOTAL RETURN FOR THE PERIOD 9.99% = T
<PAGE> 1
16(a)(vi)
FLORIDA INSURED TAX FREE INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
Class A Shares
<TABLE>
<S><C>
Class A Shares
Formula Total income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$ 61,778.28 - $750.43 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.93%
940,990.275 X $15.96 -----
Class A Shares $ 61,778.28 - $17,043.85 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 3.60%
Expense Waiver 940,990.275 X $15.96 -----
Waived Expense Adjustment (4.93%-3.60%) 1.33%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.93%
+Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.93% .23%
-Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 4.41%
=====
-Waived Expense Adjustment 1.33%
-----
Class B Share SEC Yield (Without Expense Waiver) 3.08%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.93%
+Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.93% .23%
-Expense Differential between Class A Shares and Class C Shares .75%
-----
Class C Share SEC Yield 4.41%
=====
-Waived Expense Adjustment 1.33%
-----
Class C Share SEC Yield (Without Expense Waiver) 3.08%
=====
<PAGE> 2
FLORIDA INSURED TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
-------------------------------
Current Offering Price
Class A Shares
$.7980
------
$15.96 = 5.00%
Class B Shares
$.6912
------
$15.20 = 4.55%
Class C Shares
$.6912
------
$15.21 = 4.54%
<PAGE> 3
FLORIDA INSURED TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.93%
-----
1-36% = 7.70%
Class B Shares
4.41%
-----
1-36% = 6.89%
Class C Shares
4.41%
-----
1-36% = 6.89%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.00%
-----
1-36% = 7.81%
Class B Shares
4.55%
-----
1-36% = 7.11%
Class C Shares
4.54%
-----
1-36% = 7.09%
<PAGE> 4
FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $985.51 = P
Ending Redeemable Value $1,091.62 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 10.77% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $938.70 = P
Ending Redeemable Value $1,091.62 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 16.29% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,091.62 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 6.38% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $952.69 = P
Ending Redeemable Value $1,091.62 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 10.09% = T
<PAGE> 5
FLORIDA INSURED TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,091.62 = ERV
TOTAL RETURN FOR THE PERIOD 9.16% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.20
Initial Investment $952.69 = P
Ending Redeemable Value $1,091.62 = ERV
TOTAL RETURN FOR THE PERIOD 14.58% = T
<PAGE> 6
FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.20
Initial Investment $981.89 = P
Ending Redeemable Value $1,095.13 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 11.53% = T
Excluding Payment of the CDSC
Net Asset Value $15.20
Initial Investment $981.89 = P
Ending Redeemable Value $1,134.41 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 15.53% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,096.91 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 6.75% = T
Excluding Payment of the CDSC
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,134.41 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 9.31% = T
<PAGE> 7
FLORIDA INSURED TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,096.91 = ERV
TOTAL RETURN FOR THE PERIOD 9.69% = T
Excluding Payment of the CDSC
Net Asset Value $15.20
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,134.41 = ERV
TOTAL RETURN FOR THE PERIOD 13.44% = T
<PAGE> 8
FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1994
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.21
Initial Investment $981.89 = P
Ending Redeemable Value $1,125.36 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 14.61% = T
Excluding Payment of the CDSC
Net Asset Value $15.21
Initial Investment $981.89 = P
Ending Redeemable Value $1,135.18 = ERV
One year period ended 12/31/95 = (12 Mos.) 1 = n
TOTAL RETURN FOR THE PERIOD 15.61% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,135.18 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 9.36% = T
Excluding Payment of the CDSC
Net Asset Value $15.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,135.18 = ERV
Inception through 12/31/95 = (17 Mos.) 1.41667 = n
TOTAL RETURN FOR THE PERIOD 9.36% = T
<PAGE> 9
FLORIDA INSURED TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $15.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,135.18 = ERV
TOTAL RETURN FOR THE PERIOD 13.52% = T
Excluding Payment of the CDSC
Net Asset Value $15.21
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,135.18 = ERV
TOTAL RETURN FOR THE PERIOD 13.52% = T
<PAGE> 1
EXHIBIT 16(a)(vii)
NEW JERSEY TAX FREE INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$25,873.75 - $947.63 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 4.95%
387,821.690 X $15.75 -----
Class A Shares $25,873.75 - $10,772.20 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 2.99%
Expense Waiver 387,821.690 X $15.75 -----
Waived Expense Adjustment (4.95%-2.99%) 1.96%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.95%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.95% .24%
- Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 4.44%
=====
- Waived Expense Adjustment 1.96%
-----
Class B Share SEC Yield (Without Expense Waiver) 2.48%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 4.95%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 4.95% .24%
- Expense Differential between Class A Shares and Class C Shares .75%
-----
Class C Share SEC Yield 4.44%
=====
- Waived Expense Adjustment 1.96%
-----
Class C Share SEC Yield (Without Expense Waiver) 2.48%
=====
<PAGE> 2
NEW JERSEY TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$.774
------
$15.75 = 4.91%
Class B Shares
$.666
------
$14.99 = 4.44%
Class C Shares
$.666
------
$15.00 = 4.44%
<PAGE> 3
NEW JERSEY TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula
SEC Yield
------------
1 - Tax Rate
Class A Shares
4.95%
-------
1-40.2% = 8.28%
Class B Shares
4.44%
-------
1-40.2% = 7.42%
Class C Shares
4.44%
-------
1-40.2% = 7.42%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula
Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
4.91%
-------
1-40.2% = 8.21%
Class B Shares
4.44%
-------
1-40.2% = 7.42%
Class C Shares
4.44%
-------
1-40.2% = 7.42%
<PAGE> 4
NEW JERSEY TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $982.06 = P
Ending Redeemable Value $1,078.14 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 9.78% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $935.41 = P
Ending Redeemable Value $1,078.14 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 15.26% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,078.14 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 5.45% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $952.69 = P
Ending Redeemable Value $1,078.14 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 9.12% = T
<PAGE> 5
NEW JERSEY TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,078.14 = ERV
TOTAL RETURN FOR THE PERIOD 7.81% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.00
Initial Investment $952.69 = P
Ending Redeemable Value $1,078.14 = ERV
TOTAL RETURN FOR THE PERIOD 13.17% = T
<PAGE> 6
NEW JERSEY TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $978.45 = P
Ending Redeemable Value $1,080.48 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 10.43% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $978.45 = P
Ending Redeemable Value $1,119.62 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.43% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,082.12 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 5.73% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,119.62 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.30% = T
<PAGE> 7
NEW JERSEY TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,082.12 = ERV
TOTAL RETURN FOR THE PERIOD 8.21% = T
Excluding Payment of the CDSC
Net Asset Value $14.99
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,119.62 = ERV
TOTAL RETURN FOR THE PERIOD 11.96% = T
<PAGE> 8
NEW JERSEY TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.00
Initial Investment $979.15 = P
Ending Redeemable Value $1,110.55 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 13.42% = T
Excluding Payment of the CDSC
Net Asset Value $15.00
Initial Investment $979.15 = P
Ending Redeemable Value $1,120.34 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 14.42% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.34 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.35% = T
Excluding Payment of the CDSC
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.34 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.35% = T
<PAGE> 9
NEW JERSEY TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.34 = ERV
TOTAL RETURN FOR THE PERIOD 12.03% = T
Excluding Payment of the CDSC
Net Asset Value $15.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,120.34 ERV
TOTAL RETURN FOR THE PERIOD 12.03% = T
<PAGE> 1
EXHIBIT 16(a)(viii)
NEW YORK TAX FREE INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING DECEMBER 30, 1995
<TABLE>
<S><C>
Class A Shares
Formula Total Income - Total Expenses 6
[((((------------------------ ----------------------)+1) )-1)*2]= SEC Yield
Class A Shares Average Dividend Shares X Public Offering Price ---------
$22,683.45 - $431.05 6
Class A Shares [((((------------------------ ----------------------)+1) )-1)*2]= 5.03%
339,360.950 X $15.80 -----
Class A Shares $22,683.45 - $8,031.90 6
Without [((((------------------------ ----------------------)+1) )-1)*2]= 3.30%
Expense Waiver 339,360.950 X $15.80 -----
Waived Expense Adjustment (5.03%-3.30%) 1.73%
=====
</TABLE>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 5.03%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 5.03% .24%
- Expense Differential between Class A Shares and Class B Shares .75%
-----
Class B Share SEC Yield 4.52%
=====
- Waived Expense Adjustment 1.73%
-----
Class B Share SEC Yield (Without Expense Waiver) 2.79%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 5.03%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 5.03% .24%
- Expense Differential between Class A Shares and Class C Shares .76%
-----
Class C Share SEC Yield 4.51%
=====
- Waived Expense Adjustment 1.73%
-----
Class C Share SEC Yield (Without Expense Waiver) 2.78%
=====
<PAGE> 2
NEW YORK TAX FREE INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1995
Current Annual Income Per Share
Current Offering Price
Class A Shares
$0.798
------
$15.80 = 5.05%
Class B Shares
$0.690
------
$15.05 = 4.58%
Class C Shares
$0.690
------
$15.04 = 4.59%
<PAGE> 3
NEW YORK TAX FREE INCOME FUND
CALCULATION OF TAXABLE EQUIVALENT SEC YIELD
Formula SEC Yield
------------
1 - Tax Rate
Class A Shares
5.03%
-------
1-40.9% = 8.51%
Class B Shares
4.52%
-------
1-40.9% = 7.65%
Class C Shares
4.51%
-------
1-40.9% = 7.63%
CALCULATION OF TAXABLE EQUIVALENT DISTRIBUTION RATE
Formula Distribution Rate
-----------------
1 - Tax Rate
Class A Shares
5.05%
-------
1-40.9% = 8.54%
Class B Shares
4.58%
-------
1-40.9% = 7.75%
Class C Shares
4.59%
-------
1-40.9% = 7.77%
<PAGE> 4
NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $970.93 = P
Ending Redeemable Value $1,085.04 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 11.75% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $924.81 = P
Ending Redeemable Value $1,085.04 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 17.33% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,085.04 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 5.93% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $952.69 = P
Ending Redeemable Value $1,085.04 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 9.62% = T
<PAGE> 5
NEW YORK TAX FREE INCOME FUND - CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,085.04 = ERV
TOTAL RETURN FOR THE PERIOD 8.50% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $952.69 = P
Ending Redeemable Value $1,085.04 = ERV
TOTAL RETURN FOR THE PERIOD 13.89% = T
<PAGE> 6
NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.05
Initial Investment $968.02 = P
Ending Redeemable Value $1,088.69 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 12.47% = T
Excluding Payment of the CDSC
Net Asset Value $15.05
Initial Investment $968.02 = P
Ending Redeemable Value $1,127.41 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 16.47% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,089.91 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 6.27% = T
Excluding Payment of the Sales Charge
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,127.41 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.83% = T
<PAGE> 7
NEW YORK TAX FREE INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
------- = T
P
Including Payment of the CDSC
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,089.91 = ERV
TOTAL RETURN FOR THE PERIOD 8.99% = T
Excluding Payment of the CDSC
Net Asset Value $15.05
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,127.41 = ERV
TOTAL RETURN FOR THE PERIOD 12.74% = T
<PAGE> 8
NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.04
Initial Investment $968.02 = P
Ending Redeemable Value $1,117.00 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 15.39% = T
Excluding Payment of the CDSC
Net Asset Value $15.04
Initial Investment $968.02 = P
Ending Redeemable Value $1,126.68 = ERV
n
One year period ended 12/31/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 16.39% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1995
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $15.04
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,126.68 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.78% = T
Excluding Payment of the CDSC
Net Asset Value $15.04
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,126.68 = ERV
n
Inception through 12/31/95 = (17 Mos.) 1.41667 =
TOTAL RETURN FOR THE PERIOD 8.78% = T
<PAGE> 9
NEW YORK TAX FREE INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1995
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $15.04
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,126.68 = ERV
TOTAL RETURN FOR THE PERIOD 12.67% = T
Excluding Payment of the CDSC
Net Asset Value $15.04
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,126.68 = ERV
TOTAL RETURN FOR THE PERIOD 12.67% = T
<PAGE> 1
EXHIBIT 17(a)
INVESTMENT COMPANIES FOR WHICH
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS INC.
ACTS AS PRINCIPAL UNDERWRITER OR DEPOSITOR
MARCH 21, 1996
Van Kampen American Capital U.S. Government Trust
Van Kampen American Capital U.S. Government Fund
Van Kampen American Capital Tax Free Trust
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 Municipal Income 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
Van Kampen American Capital New York Tax Free Income Fund
Van Kampen American Capital Trust
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund
Van Kampen American Capital Emerging Markets Income Fund
Van Kampen American Capital Equity Trust
Van Kampen American Capital Utility Fund
Van Kampen American Capital Balanced Fund
Van Kampen American Capital Pennsylvania Tax Free Income Fund
Van Kampen American Capital Tax Free Money Fund
Van Kampen American Capital Prime Rate Income Trust
Van Kampen Merritt Series Trust
Van Kampen Merritt Quality Income Portfolio
Van Kampen Merritt High Yield Portfolio
Van Kampen Merritt Growth and Income Portfolio
Van Kampen Merritt Money Market Portfolio
Van Kampen Merritt Stock Index Portfolio
Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Government Target Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust
Van Kampen American Capital Common Stock Fund
Van Kampen American Capital Domestic Strategic Income Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Government Fund
Van Kampen American Capital Money Market Fund
Van Kampen American Capital Multiple Strategy Fund
Van Kampen American Capital Real Estate Securities Fund
<PAGE> 2
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Texas Tax Free Income Fund
Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
Internet Trust
Michigan Real Estate Income and Growth Trust
Van Kampen American Capital Insured Income Trust
Strategic Ten Trust, United States
Strategic Ten Trust, United Kingdom
Strategic Ten Trust, Hong Kong
Strategic Five Trust, United States
Van Kampen American Capital Equity Opportunity Trust
Principal Trust Princor Emerging Growth and Treasury
International Assets Advisory Corporation Global Blue Chip Trust
<PAGE> 3
<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust . . . . . . . . . . . . . . . . . . . Series 1
Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 368
Insured Municipals Income Trust (Discount) . . . . . . . . . . . . . . . . . Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) . . . . . . . . . . Series 1 through 103
1000 Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . Series 5 through 86
Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . . . . Series 9 through 83
Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . . Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) . . . . . . Series 1 and 2
Insured Tax Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 93
Investors' Quality Tax-Exempt Trust-Intermediate . . . . . . . . . . . . . . Series 1
Investors' Corporate Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 12
Investors' Governmental Securities Income Trust . . . . . . . . . . . . . . . Series 1 through 7
Van Kampen Merritt International Bond Income Trust . . . . . . . . . . . . . Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1
Alabama Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 9
Arizona Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 18
Arizona Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 15
Arkansas Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1
California Insured Municipals Income Trust . . . . . . . . . . . . . . . . . Series 1 through 150
California Insured Municipals Income Trust (Premium Bond Series) . . . . . . Series 1
California Insured Municipals Income Trust (1st Intermediate Series) . . . . Series 1 through 3
California Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . Series 1 through 21
California Insured Municipals Income Trust (Intermediate Laddered) . . . . . Series 1 through 22
Colorado Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 79
Colorado Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 18
Connecticut Insured Municipals Income Trust . . . . . . . . . . . . . . . . . Series 1 through 29
Connecticut Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . Series 1
Delaware Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 101
Florida Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) . . . . . . . Series 1 through 13
Georgia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 78
Georgia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Municipals Trust (AMT) . . . . . . . . . . . . . . . . . . Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 57
Louisiana Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1
Maryland Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 75
Massachusetts Insured Municipals Income Trust . . . . . . . . . . . . . . . . Series 1 through 31
Massachusetts Insured Municipals Income Trust (Premium Bond Series) . . . . . Series 1
Michigan Financial Institutions Trust . . . . . . . . . . . . . . . . . . . . Series 1
Michigan Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 135
Michigan Insured Municipals Income Trust (Premium Bond Series) . . . . . . . Series 1
Michigan Insured Municipals Income Trust (1st Intermediate Series) . . . . . Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 30
Minnesota Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 57
Minnesota Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 21
Missouri Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 94
Missouri Insured Municipals Income Trust (Premium Bond Series) . . . . . . . Series 1
Missouri Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 15
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . Series 1
Nebraska Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 9
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
New Mexico Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 18
New Jersey Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 109
New Jersey Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . Series 1 and 4
New York Insured Municipals Income Trust-Intermediate . . . . . . . . . . . . . Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 131
New York Insured Tax-Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 17
New York Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1
North Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . Series 1 through 85
Ohio Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 101
Ohio Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . . . Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Oklahoma Insured Municipal Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 17
Oregon Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 53
Pennsylvania Insured Municipals Income Trust - Intermediate . . . . . . . . . . Series 1 through 6
Pennsylvania Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 215
Pennsylvania Insured Municipals Income Trust (Premium Bond Series) . . . . . . . Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . Series 1 through 81
Stepstone Growth Equity and Treasury Securities Trust . . . . . . . . . . . . . Series 1
Tennessee Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1-3 and 5-34
Texas Insured Municipal Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 40
Texas Insured Municipals Income Trust (Intermediate Ladder) . . . . . . . . . . Series 1
Virginia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1 through 69
Van Kampen American Capital Equity Opportunity Trust . . . . . . . . . . . . . . Series 1 through 28
Van Kampen Merritt Utility Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Van Kampen American Capital Insured Income Trust . . . . . . . . . . . . . . . . Series 1 through 53
Van Kampen Merritt Insured Income Trust (Intermediate Term) . . . . . . . . . . Series 1 through 44
Van Kampen Merritt Select Equity Trust . . . . . . . . . . . . . . . . . . . . . Series 1
Van Kampen Merritt Select Equity and Treasury Trust . . . . . . . . . . . . . . Series 1
Washington Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1
West Virginia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . Series 1 through 6
Principal Financial Institutions Trust . . . . . . . . . . . . . . . . . . . . . Series 1
Internet Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1
Michigan Real Estate Income and Growth Trust . . . . . . . . . . . . . . . . . . Series 1
Strategic Ten Trust, United States . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 7
Strategic Ten Trust, United Kingdom . . . . . . . . . . . . . . . . . . . . . . Series 1 through 7
Strategic Ten Trust, Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 7
Strategic Five Trust, United States . . . . . . . . . . . . . . . . . . . . . . Series 1
Equity Opportunity Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 29
Emerging Growth and Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1
Global Blue Chip Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1
</TABLE>
<PAGE> 1
EXHIBIT 17(b)
OFFICERS
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & Chief Executive Officer Houston, TX
William R. Molinari President & Chief Operating Oakbrook Terrace, IL
Officer
Ronald A. Nyberg Executive Vice President & General Oakbrook Terrace, IL
Counsel
William R. Rybak Executive Vice President & Chief Oakbrook Terrace, IL
Financial Officer
Paul R. Wolkenberg Executive Vice President Houston, TX
Robert A. Broman Sr. Vice President Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
Keith K. Furlong Sr. Vice President Oakbrook Terrace, IL
Douglas B. Gehrman Sr. Vice President Houston, TX
Richard D. Humphrey Sr. Vice President Houston, TX
Scott E. Martin Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Debra A. Nichols Sr. Vice President Houston, TX
Charles G. Millington Sr. Vice President & Treasurer Oakbrook Terrace, IL
Colette Saucedo Sr. Vice President Houston, TX
Robert S. West Sr. Vice President Oakbrook Terrace, IL
John H. Zimmermann, III Sr. Vice President Oakbrook Terrace, IL
Timothy K. Brown 1st Vice President Laguna Niguel, CA
James S. Fosdick 1st Vice President Oakbrook Terrace, IL
Dominic C. Martellaro 1st Vice President San Francisco, CA
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
Mark T. McGannon 1st Vice President Oakbrook Terrace, IL
James J. Ryan 1st Vice President Oakbrook Terrace, IL
Michael L. Stallard 1st Vice President Oakbrook Terrace, IL
Laurence J. Althoff Vice President & Controller Oakbrook Terrace, IL
James K. Ambrosio Vice President Massapequa, NY
Patricia A. Bettlach Vice President St. Louis, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
James J. Boyne Vice President & Assistant Secretary Oakbrook Terrace, IL
Linda Mae Brown Vice President Oakbrook Terrace, IL
William F. Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Thomas M. Byron Vice President Oakbrook Terrace, IL
Glenn M. Cackovic Vice President Laguna Niguel, CA
Joseph N. Caggiano Vice President New York, NY
Richard J. Charlino Vice President Oakbrook Terrace, IL
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
Suzanne Cummings Vice President Houston, TX
David B. Dibo Vice President Oakbrook Terrace, IL
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Howard A. Doss Vice President Tampa, FL
Jonathan Eckhard Vice President Boulder, CO
Charles Edward Fisher Vice President Oakbrook Terrace, IL
William J. Fow Vice President Redding, CT
Nicholas Joseph Foxhoven Vice President Denver, CO
Charles Friday Vice President Gibsonia, PA
Nori L. Gabert Vice President, Assoc. General Houston, TX
Counsel & Asst. Secretary
Erich P. Gerth Vice President Dallas, TX
Daniel Hamilton Vice President Houston, TX
John A. Hanhauser Vice President Philadelphia, PA
Eric J. Hargens Vice President Orlando, FL
Susan J. Hill Vice President Oakbrook Terrace, IL
J. Christopher Jackson Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
Lowell Jackson Vice President Norcross, GA
Dana R. Klein Vice President Oakbrook Terrace, IL
Ann Marie Klingenhagen Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
David R. Kowalski Vice President & Director Oakbrook Terrace, IL
of Compliance
S. William Lehew III Vice President Charlotte, NC
Robert C. Lodge Vice President Philadelphia, PA
Walter Lynn Vice President Flower Mound, TX
Michele L. Manley Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Carl Mayfield Vice President Lakewood, CO
Ruth L. McKeel Vice President Oakbrook Terrace, IL
John Mills Vice President Kenner, LA
Robert Muller, Jr. Vice President Houston, TX
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Oakbrook Terrace, IL
Walter E. Rein Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
James B. Ross Vice President Oakbrook Terrace, IL
Heather R. Sabo Vice President Richmond, Va
Stephanie Scarlata Vice President Lynbrook, NY
Lisa A. Schomer Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
Jeffrey C. Shirk Vice President Boston, MA
Kimberly M. Spangler Vice President Atlanta, GA
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
William C. Strafford Vice President Granger, IN
James C. Taylor Vice President Oakbrook Terrace, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Jeff Warland Vice President Oakbrook Terrace, IL
Sandra A. Waterworth Vice President and Assistant Oakbrook Terrace, IL
Secretary
Steven T. West Vice President Wayne, PA
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
James R. Yount Vice President Seattle, WA
Richard P. Zgonina Vice President Oakbrook Terrace, IL
Brian P. Arcara Asst. Vice President Philadelphia, PA
Christopher M. Bisaillon Asst. Vice President Oakbrook Terrace, IL
Eric J. Bridges Asst. Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Robert C. Brooks Asst. Vice President Manchester, MA
Richard B. Callaghan Asst. Vice President Oakbrook Terrace, IL
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Stephen M. Cutka Asst. Vice President Oakbrook Terrace, IL
Nicholas Dalmaso Asst. Vice President & Asst. Oakbrook Terrace, IL
Secretary
Gerald A. Davis Asst. Vice President Oakbrook Terrace, IL
Daniel R. DeJong Asst. Vice President Oakbrook Terrace, IL
Jerome M. Dybzinski Asst. Vice President Oakbrook Terrace, IL
Melissa B. Epstein Asst. Vice President Houston, TX
Huey P. Falgout, Jr. Asst. Vice President & Asst. Secretary Houston, TX
Rocco Fiordelisi III Asst. Vice President St. Louis, MO
Robert D. Gorski Asst. Vice President Oakbrook Terrace, IL
Walter C. Gray Asst. Vice President Oakbrook Terrace, IL
Joseph Hays Asst. Vice President Philadelphia, PA
Hunter Knapp Asst. Vice President Laguna, CA
Natalie N. Hurdle Asst. Vice President New York, NY
Laurie L. Jones Asst. Vice President Houston, TX
Jeffrey Scott Kinney Asst. Vice President Oakbrook Terrace, IL
Patricia D. Lathrop Asst. Vice President Tampa, FL
Tony E. Leal Asst. Vice President Houston, TX
Linda S. MacAyeal Asst. Vice President Oakbrook Terrace, IL
Ann Therese McGrath Asst. Vice President Oakbrook Terrace, IL
Peggy E. Moro Asst. Vice President Oakbrook Terrace, IL
David R. Niemi Asst. Vice President Oakbrook Terrace, IL
Daniel J. O'Keefe Asst. Vice President Oakbrook Terrace, IL
Allison Okun Asst. Vice President Oakbrook Terrace, IL
David B. Partain Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Michael Quinn Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Jeffrey S. Rourke Asst. Vice President Oakbrook Terrace, IL
Thomas J. Sauerborn Asst. Vice President New York, NY
Bruce Saxon Asst. Vice President Oakbrook Terrace, IL
Andrew J. Scherer Asst. Vice President Oakbrook Terrace, IL
Jeffrey C. Shirk Asst. Vice President Philadelphia, PA
Traci T. Sorensen Asst. Vice President Oakbrook Terrace, IL
Gary Steele Asst. Vice President Philadelphia, PA
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Robert A. Watson Asst. Vice President Oakbrook Terrace, IL
Kathleen M. Wennerstrum Asst. Vice President Oakbrook Terrace, IL
Barbara A. Withers Asst. Vice President Oakbrook Terrace, IL
Melinda K. Yeager Asst. Vice President Houston, TX
David C. Goodwin Asst. Secretary Oakbrook Terrace, IL
Gina M. Scumaci Asst. Secretary Oakbrook Terrace, IL
Elizabeth M. Brown Officer Houston, TX
John Browning Officer Oakbrook Terrace, IL
Leticia George Officer Houston, TX
Gina Grippo Officer Houston, TX
Sarah Kessler Officer Oakbrook Terrace, IL
Francis McGarvey Officer Houston, TX
William D. McLaughlin Officer Houston, TX
Becky Newman Officer Houston, TX
Rosemary Pretty Officer Houston, TX
Colette Saucedo Officer Houston, TX
Frederick Shepherd Officer Houston, TX
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
</TABLE>
<PAGE> 4
DIRECTORS
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & CEO 2800 Post Oak Blvd.
Houston, TX 77056
William R. Molinari President & COO One Parkview Plaza
Oakbrook Terrace, IL 60181
Ronald A. Nyberg Executive Vice President One Parkview Plaza
& General Counsel Oakbrook Terrace, IL 60181
William R. Rybak Executive Vice President One Parkview Plaza
& CFO Oakbrook Terrace, IL 60181
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> Van Kampen American Capital Insured Tax Free Income Fund A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1342550979<F1>
<INVESTMENTS-AT-VALUE> 1475354168<F1>
<RECEIVABLES> 47649878<F1>
<ASSETS-OTHER> 53765<F1>
<OTHER-ITEMS-ASSETS> 1440794<F1>
<TOTAL-ASSETS> 1524498605<F1>
<PAYABLE-FOR-SECURITIES> 73398336<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5314811<F1>
<TOTAL-LIABILITIES> 78713147<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1240439855
<SHARES-COMMON-STOCK> 69845771
<SHARES-COMMON-PRIOR> 63181868
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (50709)<F1>
<ACCUMULATED-NET-GAINS> (5502403)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 132803189<F1>
<NET-ASSETS> 1365380085
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 80236681<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 11552042<F1>
<NET-INVESTMENT-INCOME> 68684639<F1>
<REALIZED-GAINS-CURRENT> 2635762<F1>
<APPREC-INCREASE-CURRENT> 135893028<F1>
<NET-CHANGE-FROM-OPS> 207213429<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (66799203)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17358362
<NUMBER-OF-SHARES-REDEEMED> (13162194)
<SHARES-REINVESTED> 2467735
<NET-CHANGE-IN-ASSETS> 255156539
<ACCUMULATED-NII-PRIOR> 37808<F1>
<ACCUMULATED-GAINS-PRIOR> (6960321)<F1>
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5813647<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 11565167<F1>
<AVERAGE-NET-ASSETS> 1220129584
<PER-SHARE-NAV-BEGIN> 17.572
<PER-SHARE-NII> 1.021
<PER-SHARE-GAIN-APPREC> 1.982
<PER-SHARE-DIVIDEND> (1.026)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.549
<EXPENSE-RATIO> .88
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> Van Kampen American Capital Insured Tax Free Income Fund
B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1342550979<F1>
<INVESTMENTS-AT-VALUE> 1475354168<F1>
<RECEIVABLES> 47649878<F1>
<ASSETS-OTHER> 53765<F1>
<OTHER-ITEMS-ASSETS> 1440794<F1>
<TOTAL-ASSETS> 1524498605<F1>
<PAYABLE-FOR-SECURITIES> 73398336<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5314811<F1>
<TOTAL-LIABILITIES> 78713147<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 72835537
<SHARES-COMMON-STOCK> 3850770
<SHARES-COMMON-PRIOR> 1709564
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (50709)<F1>
<ACCUMULATED-NET-GAINS> (5502403)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 132803189<F1>
<NET-ASSETS> 75278779
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 80236681<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 11552042<F1>
<NET-INVESTMENT-INCOME> 68684639<F1>
<REALIZED-GAINS-CURRENT> 2635762<F1>
<APPREC-INCREASE-CURRENT> 135893028<F1>
<NET-CHANGE-FROM-OPS> 207213429<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2061251)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2506874
<NUMBER-OF-SHARES-REDEEMED> (422533)
<SHARES-REINVESTED> 56865
<NET-CHANGE-IN-ASSETS> 45253443
<ACCUMULATED-NII-PRIOR> 37808<F1>
<ACCUMULATED-GAINS-PRIOR> (6960321)<F1>
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5813647<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 11565167<F1>
<AVERAGE-NET-ASSETS> 44898502
<PER-SHARE-NAV-BEGIN> 17.563
<PER-SHARE-NII> .890
<PER-SHARE-GAIN-APPREC> 1.978
<PER-SHARE-DIVIDEND> (.882)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.549
<EXPENSE-RATIO> 1.67
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> Van Kampen American Capital Insured Tax Free Income Fund
C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 1342550979<F1>
<INVESTMENTS-AT-VALUE> 1475354168<F1>
<RECEIVABLES> 47649878<F1>
<ASSETS-OTHER> 53765<F1>
<OTHER-ITEMS-ASSETS> 1440794<F1>
<TOTAL-ASSETS> 1524498605<F1>
<PAYABLE-FOR-SECURITIES> 73398336<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 5314811<F1>
<TOTAL-LIABILITIES> 78713147<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 5259989
<SHARES-COMMON-STOCK> 262260
<SHARES-COMMON-PRIOR> 199168
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (50709)<F1>
<ACCUMULATED-NET-GAINS> (5502403)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 132803189<F1>
<NET-ASSETS> 5126594
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 80236681<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 11552042<F1>
<NET-INVESTMENT-INCOME> 68684639<F1>
<REALIZED-GAINS-CURRENT> 2635762<F1>
<APPREC-INCREASE-CURRENT> 135893028<F1>
<NET-CHANGE-FROM-OPS> 207213429<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (181333)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 105778
<NUMBER-OF-SHARES-REDEEMED> (51141)
<SHARES-REINVESTED> 8455
<NET-CHANGE-IN-ASSETS> 1627619
<ACCUMULATED-NII-PRIOR> 37808<F1>
<ACCUMULATED-GAINS-PRIOR> (6960321)<F1>
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5813647<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 11565167<F1>
<AVERAGE-NET-ASSETS> 3903604
<PER-SHARE-NAV-BEGIN> 17.568
<PER-SHARE-NII> .883
<PER-SHARE-GAIN-APPREC> 1.979
<PER-SHARE-DIVIDEND> (.882)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.548
<EXPENSE-RATIO> 1.67
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 021
<NAME> Tax Free High Income Fund A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 775468826<F1>
<INVESTMENTS-AT-VALUE> 814475412<F1>
<RECEIVABLES> 19209818<F1>
<ASSETS-OTHER> 34108<F1>
<OTHER-ITEMS-ASSETS> 2522019<F1>
<TOTAL-ASSETS> 836241357<F1>
<PAYABLE-FOR-SECURITIES> 18173566<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4800559<F1>
<TOTAL-LIABILITIES> 22974125<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 715993345
<SHARES-COMMON-STOCK> 44433895
<SHARES-COMMON-PRIOR> 43541483
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8760023)<F1>
<ACCUMULATED-NET-GAINS> (79918600)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 39038275<F1>
<NET-ASSETS> 665822295
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 61183874<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 8255468<F1>
<NET-INVESTMENT-INCOME> 52928406<F1>
<REALIZED-GAINS-CURRENT> (18443786)<F1>
<APPREC-INCREASE-CURRENT> 75421063<F1>
<NET-CHANGE-FROM-OPS> 109905683<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (42013439)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4222270
<NUMBER-OF-SHARES-REDEEMED> (4634819)
<SHARES-REINVESTED> 1304961
<NET-CHANGE-IN-ASSETS> 62861953
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (61474814)<F1>
<OVERDISTRIB-NII-PRIOR> (11937829)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3705007<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8268593<F1>
<AVERAGE-NET-ASSETS> 634296540
<PER-SHARE-NAV-BEGIN> 13.848
<PER-SHARE-NII> 1.024
<PER-SHARE-GAIN-APPREC> 1.072
<PER-SHARE-DIVIDEND> (.960)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.984
<EXPENSE-RATIO> .95
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> Tax Free High Income Fund B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 775468826<F1>
<INVESTMENTS-AT-VALUE> 814475412<F1>
<RECEIVABLES> 19209818<F1>
<ASSETS-OTHER> 34108<F1>
<OTHER-ITEMS-ASSETS> 2522019<F1>
<TOTAL-ASSETS> 836241357<F1>
<PAYABLE-FOR-SECURITIES> 18173566<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4800559<F1>
<TOTAL-LIABILITIES> 22974125<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 137196174
<SHARES-COMMON-STOCK> 9205700
<SHARES-COMMON-PRIOR> 8114129
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8760023)<F1>
<ACCUMULATED-NET-GAINS> (79918600)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 39038275<F1>
<NET-ASSETS> 137933467
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 61183874<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 8255468<F1>
<NET-INVESTMENT-INCOME> 52928406<F1>
<REALIZED-GAINS-CURRENT> (18443786)<F1>
<APPREC-INCREASE-CURRENT> 75421063<F1>
<NET-CHANGE-FROM-OPS> 109905683<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (7196226)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2414527
<NUMBER-OF-SHARES-REDEEMED> (1504466)
<SHARES-REINVESTED> 181510
<NET-CHANGE-IN-ASSETS> 25555723
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (61474814)<F1>
<OVERDISTRIB-NII-PRIOR> (11937829)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3705007<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8268593<F1>
<AVERAGE-NET-ASSETS> 123426275
<PER-SHARE-NAV-BEGIN> 13.850
<PER-SHARE-NII> .908
<PER-SHARE-GAIN-APPREC> 1.071
<PER-SHARE-DIVIDEND> (.846)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.983
<EXPENSE-RATIO> 1.70
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> Tax Free High Income Fund C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 775468826<F1>
<INVESTMENTS-AT-VALUE> 814475412<F1>
<RECEIVABLES> 19209818<F1>
<ASSETS-OTHER> 34108<F1>
<OTHER-ITEMS-ASSETS> 2522019<F1>
<TOTAL-ASSETS> 836241357<F1>
<PAYABLE-FOR-SECURITIES> 18173566<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4800559<F1>
<TOTAL-LIABILITIES> 22974125<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 9718061
<SHARES-COMMON-STOCK> 634649
<SHARES-COMMON-PRIOR> 546145
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (8760023)<F1>
<ACCUMULATED-NET-GAINS> (79918600)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 39038275<F1>
<NET-ASSETS> 9511470
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 61183874<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 8255468<F1>
<NET-INVESTMENT-INCOME> 52928406<F1>
<REALIZED-GAINS-CURRENT> (18443786)<F1>
<APPREC-INCREASE-CURRENT> 75421063<F1>
<NET-CHANGE-FROM-OPS> 109905683<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (469250)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 265279
<NUMBER-OF-SHARES-REDEEMED> (197847)
<SHARES-REINVESTED> 21072
<NET-CHANGE-IN-ASSETS> 1949402
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (61474814)<F1>
<OVERDISTRIB-NII-PRIOR> (11937829)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3705007<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8268593<F1>
<AVERAGE-NET-ASSETS> 8143503
<PER-SHARE-NAV-BEGIN> 13.846
<PER-SHARE-NII> .910
<PER-SHARE-GAIN-APPREC> 1.077
<PER-SHARE-DIVIDEND> (.846)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.987
<EXPENSE-RATIO> 1.69
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> VKAC California Insured Tax Free Fund A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 164521399<F1>
<INVESTMENTS-AT-VALUE> 178870700<F1>
<RECEIVABLES> 3086408<F1>
<ASSETS-OTHER> 6403<F1>
<OTHER-ITEMS-ASSETS> 85328<F1>
<TOTAL-ASSETS> 182048839<F1>
<PAYABLE-FOR-SECURITIES> 7142923<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 898594<F1>
<TOTAL-LIABILITIES> 8041517<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 139971316
<SHARES-COMMON-STOCK> 8319584
<SHARES-COMMON-PRIOR> 8245311
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7345503)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 14349301<F1>
<NET-ASSETS> 147556165
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 9958924<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 1610268<F1>
<NET-INVESTMENT-INCOME> 8348656<F1>
<REALIZED-GAINS-CURRENT> 20891<F1>
<APPREC-INCREASE-CURRENT> 18451807<F1>
<NET-CHANGE-FROM-OPS> 26821354<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (7355019)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 986569
<NUMBER-OF-SHARES-REDEEMED> (1170822)
<SHARES-REINVESTED> 258526
<NET-CHANGE-IN-ASSETS> 17261676
<ACCUMULATED-NII-PRIOR> 18913<F1>
<ACCUMULATED-GAINS-PRIOR> (7466853)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 783620<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1868640<F1>
<AVERAGE-NET-ASSETS> 140106690
<PER-SHARE-NAV-BEGIN> 15.802
<PER-SHARE-NII> .884
<PER-SHARE-GAIN-APPREC> 1.938
<PER-SHARE-DIVIDEND> (.888)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.736
<EXPENSE-RATIO> .89
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> VKAC California Insured Tax Free Fund B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 164521399<F1>
<INVESTMENTS-AT-VALUE> 178870700<F1>
<RECEIVABLES> 3086408<F1>
<ASSETS-OTHER> 6403<F1>
<OTHER-ITEMS-ASSETS> 85328<F1>
<TOTAL-ASSETS> 182048839<F1>
<PAYABLE-FOR-SECURITIES> 7142923<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 898594<F1>
<TOTAL-LIABILITIES> 8041517<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 24804730
<SHARES-COMMON-STOCK> 1387788
<SHARES-COMMON-PRIOR> 1079043
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7345503)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 14349301<F1>
<NET-ASSETS> 24613802
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 9958924<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 1610268<F1>
<NET-INVESTMENT-INCOME> 8348656<F1>
<REALIZED-GAINS-CURRENT> 20891<F1>
<APPREC-INCREASE-CURRENT> 18451807<F1>
<NET-CHANGE-FROM-OPS> 26821354<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (897526)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 434181
<NUMBER-OF-SHARES-REDEEMED> (157415)
<SHARES-REINVESTED> 31979
<NET-CHANGE-IN-ASSETS> 7559008
<ACCUMULATED-NII-PRIOR> 18913<F1>
<ACCUMULATED-GAINS-PRIOR> (7466853)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 783620<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1868640<F1>
<AVERAGE-NET-ASSETS> 20154553
<PER-SHARE-NAV-BEGIN> 15.805
<PER-SHARE-NII> .766
<PER-SHARE-GAIN-APPREC> 1.926
<PER-SHARE-DIVIDEND> (.761)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.736
<EXPENSE-RATIO> 1.61
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> VKAC California Insured Tax Free Fund C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 164521399<F1>
<INVESTMENTS-AT-VALUE> 178870700<F1>
<RECEIVABLES> 3086408<F1>
<ASSETS-OTHER> 6403<F1>
<OTHER-ITEMS-ASSETS> 85328<F1>
<TOTAL-ASSETS> 182048839<F1>
<PAYABLE-FOR-SECURITIES> 7142923<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 898594<F1>
<TOTAL-LIABILITIES> 8041517<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 2227478
<SHARES-COMMON-STOCK> 103597
<SHARES-COMMON-PRIOR> 176321
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7345503)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 14349301<F1>
<NET-ASSETS> 1837355
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 9958924<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 1610268<F1>
<NET-INVESTMENT-INCOME> 8348656<F1>
<REALIZED-GAINS-CURRENT> 20891<F1>
<APPREC-INCREASE-CURRENT> 18451807<F1>
<NET-CHANGE-FROM-OPS> 26821354<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (115024)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36228
<NUMBER-OF-SHARES-REDEEMED> (112218)
<SHARES-REINVESTED> 3266
<NET-CHANGE-IN-ASSETS> (948159)
<ACCUMULATED-NII-PRIOR> 18913<F1>
<ACCUMULATED-GAINS-PRIOR> (7466853)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 783620<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1868640<F1>
<AVERAGE-NET-ASSETS> 2552438
<PER-SHARE-NAV-BEGIN> 15.798
<PER-SHARE-NII> .758
<PER-SHARE-GAIN-APPREC> 1.941
<PER-SHARE-DIVIDEND> (.761)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.736
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> Municipal Income Fund Class A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 971751897<F1>
<INVESTMENTS-AT-VALUE> 1067171101<F1>
<RECEIVABLES> 68463954<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4412<F1>
<TOTAL-ASSETS> 1135639467<F1>
<PAYABLE-FOR-SECURITIES> 60935991<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 7222552<F1>
<TOTAL-LIABILITIES> 68158543<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 793389808
<SHARES-COMMON-STOCK> 54003132
<SHARES-COMMON-PRIOR> 34768092
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (553439)<F1>
<ACCUMULATED-NET-GAINS> (43453791)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 95777573<F1>
<NET-ASSETS> 839677283
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 52794623<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 9004804<F1>
<NET-INVESTMENT-INCOME> 43789819<F1>
<REALIZED-GAINS-CURRENT> (13008288)<F1>
<APPREC-INCREASE-CURRENT> 108912791<F1>
<NET-CHANGE-FROM-OPS> 139694322<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (34867726)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 24431223
<NUMBER-OF-SHARES-REDEEMED> (6373222)
<SHARES-REINVESTED> 1177039
<NET-CHANGE-IN-ASSETS> 343862588
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (26022029)<F1>
<OVERDISTRIB-NII-PRIOR> (228298)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3765225<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 9017929<F1>
<AVERAGE-NET-ASSETS> 586866332
<PER-SHARE-NAV-BEGIN> 14.261
<PER-SHARE-NII> .874
<PER-SHARE-GAIN-APPREC> 1.296
<PER-SHARE-DIVIDEND> (.882)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.549
<EXPENSE-RATIO> .99
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> Municipal Income Fund Class B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 971751897<F1>
<INVESTMENTS-AT-VALUE> 1067171101<F1>
<RECEIVABLES> 68463954<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4412<F1>
<TOTAL-ASSETS> 1135639467<F1>
<PAYABLE-FOR-SECURITIES> 60935991<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 7222552<F1>
<TOTAL-LIABILITIES> 68158543<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 211460358
<SHARES-COMMON-STOCK> 13929963
<SHARES-COMMON-PRIOR> 11128652
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (553439)<F1>
<ACCUMULATED-NET-GAINS> (43453791)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 95777573<F1>
<NET-ASSETS> 216592629
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 52794623<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 9004804<F1>
<NET-INVESTMENT-INCOME> 43789819<F1>
<REALIZED-GAINS-CURRENT> (13008288)<F1>
<APPREC-INCREASE-CURRENT> 108912791<F1>
<NET-CHANGE-FROM-OPS> 139694322<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (9177676)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3801812
<NUMBER-OF-SHARES-REDEEMED> (1339250)
<SHARES-REINVESTED> 338749
<NET-CHANGE-IN-ASSETS> 57886743
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (26022029)<F1>
<OVERDISTRIB-NII-PRIOR> (228298)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3765225<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 9017929<F1>
<AVERAGE-NET-ASSETS> 178025774
<PER-SHARE-NAV-BEGIN> 14.261
<PER-SHARE-NII> .762
<PER-SHARE-GAIN-APPREC> 1.294
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.549
<EXPENSE-RATIO> 1.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 043
<NAME> Municipal Income Fund Class C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 971751897<F1>
<INVESTMENTS-AT-VALUE> 1067171101<F1>
<RECEIVABLES> 68463954<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 4412<F1>
<TOTAL-ASSETS> 1135639467<F1>
<PAYABLE-FOR-SECURITIES> 60935991<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 7222552<F1>
<TOTAL-LIABILITIES> 68158543<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 10860415
<SHARES-COMMON-STOCK> 721187
<SHARES-COMMON-PRIOR> 270017
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (553439)<F1>
<ACCUMULATED-NET-GAINS> (43453791)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 95777573<F1>
<NET-ASSETS> 11211012
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 52794623<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 9004804<F1>
<NET-INVESTMENT-INCOME> 43789819<F1>
<REALIZED-GAINS-CURRENT> (13008288)<F1>
<APPREC-INCREASE-CURRENT> 108912791<F1>
<NET-CHANGE-FROM-OPS> 139694322<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (313688)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 533838
<NUMBER-OF-SHARES-REDEEMED> (94687)
<SHARES-REINVESTED> 12019
<NET-CHANGE-IN-ASSETS> 7360094
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (26022029)<F1>
<OVERDISTRIB-NII-PRIOR> (228298)<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3765225<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 9017929<F1>
<AVERAGE-NET-ASSETS> 5988195
<PER-SHARE-NAV-BEGIN> 14.262
<PER-SHARE-NII> .771
<PER-SHARE-GAIN-APPREC> 1.280
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.545
<EXPENSE-RATIO> 1.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 051
<NAME> VKAC LIMITED TERM MUNICIPAL INCOME FUND A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 33858657<F1>
<INVESTMENTS-AT-VALUE> 36095333<F1>
<RECEIVABLES> 818583<F1>
<ASSETS-OTHER> 28849<F1>
<OTHER-ITEMS-ASSETS> 1443189<F1>
<TOTAL-ASSETS> 38385954<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 299659<F1>
<TOTAL-LIABILITIES> 299659<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 15073760
<SHARES-COMMON-STOCK> 1521067
<SHARES-COMMON-PRIOR> 1683270
<ACCUMULATED-NII-CURRENT> 122028<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1033130)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2236676<F1>
<NET-ASSETS> 15612391
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2302282<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (542499)<F1>
<NET-INVESTMENT-INCOME> 1759783<F1>
<REALIZED-GAINS-CURRENT> 585792<F1>
<APPREC-INCREASE-CURRENT> 2966825<F1>
<NET-CHANGE-FROM-OPS> 5312400<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (757945)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 132361
<NUMBER-OF-SHARES-REDEEMED> (346026)
<SHARES-REINVESTED> 51462
<NET-CHANGE-IN-ASSETS> (93114)
<ACCUMULATED-NII-PRIOR> 10360<F1>
<ACCUMULATED-GAINS-PRIOR> (1618922)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 188923<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 772827<F1>
<AVERAGE-NET-ASSETS> 15844101
<PER-SHARE-NAV-BEGIN> 9.330
<PER-SHARE-NII> 0.508
<PER-SHARE-GAIN-APPREC> 0.900
<PER-SHARE-DIVIDEND> (0.474)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.264
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 052
<NAME> VKAC LIMITED TERM MUNICIPAL INCOME FUND B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 33858657<F1>
<INVESTMENTS-AT-VALUE> 36095333<F1>
<RECEIVABLES> 818583<F1>
<ASSETS-OTHER> 28849<F1>
<OTHER-ITEMS-ASSETS> 1443189<F1>
<TOTAL-ASSETS> 38385954<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 299659<F1>
<TOTAL-LIABILITIES> 299659<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 17035048
<SHARES-COMMON-STOCK> 1708127
<SHARES-COMMON-PRIOR> 1895749
<ACCUMULATED-NII-CURRENT> 122028<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1033130)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2236676<F1>
<NET-ASSETS> 17530702
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2302282<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (542499)<F1>
<NET-INVESTMENT-INCOME> 1759783<F1>
<REALIZED-GAINS-CURRENT> 585792<F1>
<APPREC-INCREASE-CURRENT> 2966825<F1>
<NET-CHANGE-FROM-OPS> 5312400<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (704432)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 172036
<NUMBER-OF-SHARES-REDEEMED> (400845)
<SHARES-REINVESTED> 41187
<NET-CHANGE-IN-ASSETS> (135446)
<ACCUMULATED-NII-PRIOR> 10360<F1>
<ACCUMULATED-GAINS-PRIOR> (1618922)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 188923<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 772827<F1>
<AVERAGE-NET-ASSETS> 17392464
<PER-SHARE-NAV-BEGIN> 9.319
<PER-SHARE-NII> 0.430
<PER-SHARE-GAIN-APPREC> 0.916
<PER-SHARE-DIVIDEND> (0.402)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.263
<EXPENSE-RATIO> 1.75
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 053
<NAME> VKAC LIMITED TERM MUNICIPAL INCOME FUND C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 33858657<F1>
<INVESTMENTS-AT-VALUE> 36095333<F1>
<RECEIVABLES> 818583<F1>
<ASSETS-OTHER> 28849<F1>
<OTHER-ITEMS-ASSETS> 1443189<F1>
<TOTAL-ASSETS> 38385954<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 299659<F1>
<TOTAL-LIABILITIES> 299659<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4651913
<SHARES-COMMON-STOCK> 481795
<SHARES-COMMON-PRIOR> 506542
<ACCUMULATED-NII-CURRENT> 122028<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1033130)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2236676<F1>
<NET-ASSETS> 4943302
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 2302282<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (542499)<F1>
<NET-INVESTMENT-INCOME> 1759783<F1>
<REALIZED-GAINS-CURRENT> 585792<F1>
<APPREC-INCREASE-CURRENT> 2966825<F1>
<NET-CHANGE-FROM-OPS> 5312400<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (185738)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 197244
<NUMBER-OF-SHARES-REDEEMED> (238970)
<SHARES-REINVESTED> 16979
<NET-CHANGE-IN-ASSETS> 225112
<ACCUMULATED-NII-PRIOR> 10360<F1>
<ACCUMULATED-GAINS-PRIOR> (1618922)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 188923<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 772827<F1>
<AVERAGE-NET-ASSETS> 4565618
<PER-SHARE-NAV-BEGIN> 9.314
<PER-SHARE-NII> 0.430
<PER-SHARE-GAIN-APPREC> 0.918
<PER-SHARE-DIVIDEND> (0.402)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.260
<EXPENSE-RATIO> 1.74
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 061
<NAME> Florida Insured Tax Free Income Fund A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 29408096<F1>
<INVESTMENTS-AT-VALUE> 31414769<F1>
<RECEIVABLES> 962622<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 3359309<F1>
<TOTAL-ASSETS> 35822460<F1>
<PAYABLE-FOR-SECURITIES> 2007831<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 203889<F1>
<TOTAL-LIABILITIES> 2211720<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 15378255
<SHARES-COMMON-STOCK> 1065925
<SHARES-COMMON-PRIOR> 655210
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (11977)<F1>
<ACCUMULATED-NET-GAINS> (259956)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2006673<F1>
<NET-ASSETS> 16205600
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1395255<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 193541<F1>
<NET-INVESTMENT-INCOME> 1201714<F1>
<REALIZED-GAINS-CURRENT> (144567)<F1>
<APPREC-INCREASE-CURRENT> 2450275<F1>
<NET-CHANGE-FROM-OPS> 3507422<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (578890)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 638004
<NUMBER-OF-SHARES-REDEEMED> (240707)
<SHARES-REINVESTED> 13418
<NET-CHANGE-IN-ASSETS> 7166068
<ACCUMULATED-NII-PRIOR> 2730<F1>
<ACCUMULATED-GAINS-PRIOR> (115389)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 121439<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 504469<F1>
<AVERAGE-NET-ASSETS> 10694544
<PER-SHARE-NAV-BEGIN> 13.796
<PER-SHARE-NII> .789
<PER-SHARE-GAIN-APPREC> 1.416
<PER-SHARE-DIVIDEND> (.798)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.203
<EXPENSE-RATIO> .44
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 062
<NAME> Florida Insured Tax Free Income Fund B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 29408096<F1>
<INVESTMENTS-AT-VALUE> 31414769<F1>
<RECEIVABLES> 962622<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 3359309<F1>
<TOTAL-ASSETS> 35822460<F1>
<PAYABLE-FOR-SECURITIES> 2007831<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 203889<F1>
<TOTAL-LIABILITIES> 2211720<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 16043043
<SHARES-COMMON-STOCK> 1114583
<SHARES-COMMON-PRIOR> 786853
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (11977)<F1>
<ACCUMULATED-NET-GAINS> (259956)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2006673<F1>
<NET-ASSETS> 16943301
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1395255<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 193541<F1>
<NET-INVESTMENT-INCOME> 1201714<F1>
<REALIZED-GAINS-CURRENT> (144567)<F1>
<APPREC-INCREASE-CURRENT> 2450275<F1>
<NET-CHANGE-FROM-OPS> 3507422<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (634695)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 543226
<NUMBER-OF-SHARES-REDEEMED> (232380)
<SHARES-REINVESTED> 16884
<NET-CHANGE-IN-ASSETS> 6091217
<ACCUMULATED-NII-PRIOR> 2730<F1>
<ACCUMULATED-GAINS-PRIOR> (115389)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 121439<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 504469<F1>
<AVERAGE-NET-ASSETS> 13505292
<PER-SHARE-NAV-BEGIN> 13.792
<PER-SHARE-NII> .685
<PER-SHARE-GAIN-APPREC> 1.415
<PER-SHARE-DIVIDEND> (.691)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.201
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 063
<NAME> Florida Insured Tax Free Income Fund C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 29408096<F1>
<INVESTMENTS-AT-VALUE> 31414769<F1>
<RECEIVABLES> 962622<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 3359309<F1>
<TOTAL-ASSETS> 35822460<F1>
<PAYABLE-FOR-SECURITIES> 2007831<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 203889<F1>
<TOTAL-LIABILITIES> 2211720<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 454702
<SHARES-COMMON-STOCK> 30359
<SHARES-COMMON-PRIOR> 826
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (11977)<F1>
<ACCUMULATED-NET-GAINS> (259956)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 2006673<F1>
<NET-ASSETS> 461839
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1395255<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 193541<F1>
<NET-INVESTMENT-INCOME> 1201714<F1>
<REALIZED-GAINS-CURRENT> (144567)<F1>
<APPREC-INCREASE-CURRENT> 2450275<F1>
<NET-CHANGE-FROM-OPS> 3507422<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2836)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29482
<NUMBER-OF-SHARES-REDEEMED> (96)
<SHARES-REINVESTED> 147
<NET-CHANGE-IN-ASSETS> 450452
<ACCUMULATED-NII-PRIOR> 2730<F1>
<ACCUMULATED-GAINS-PRIOR> (115389)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 121439<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 504469<F1>
<AVERAGE-NET-ASSETS> 62575
<PER-SHARE-NAV-BEGIN> 13.786
<PER-SHARE-NII> .690
<PER-SHARE-GAIN-APPREC> 1.428
<PER-SHARE-DIVIDEND> (.691)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.213
<EXPENSE-RATIO> 1.13
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 071
<NAME> VKAC New Jersey Tax Free Income Fund A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 13504264<F1>
<INVESTMENTS-AT-VALUE> 14486546<F1>
<RECEIVABLES> 379609<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 33430<F1>
<TOTAL-ASSETS> 14985345<F1>
<PAYABLE-FOR-SECURITIES> 382581<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 76490<F1>
<TOTAL-LIABILITIES> 459071<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 5565936
<SHARES-COMMON-STOCK> 389565
<SHARES-COMMON-PRIOR> 215684
<ACCUMULATED-NII-CURRENT> (4253)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (259106)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 982282<F1>
<NET-ASSETS> 5843399
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 688966<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (88259)<F1>
<NET-INVESTMENT-INCOME> 600707<F1>
<REALIZED-GAINS-CURRENT> (171585)<F1>
<APPREC-INCREASE-CURRENT> 1207816<F1>
<NET-CHANGE-FROM-OPS> 1636938<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (244934)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 207068
<NUMBER-OF-SHARES-REDEEMED> (41615)
<SHARES-REINVESTED> 8428
<NET-CHANGE-IN-ASSETS> 2876705
<ACCUMULATED-NII-PRIOR> 1245<F1>
<ACCUMULATED-GAINS-PRIOR> (87521)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 72316<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 357369<F1>
<AVERAGE-NET-ASSETS> 4479585
<PER-SHARE-NAV-BEGIN> 13.754
<PER-SHARE-NII> .792
<PER-SHARE-GAIN-APPREC> 1.253
<PER-SHARE-DIVIDEND> (.799)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.000
<EXPENSE-RATIO> .27
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 072
<NAME> VKAC New Jersey Tax Free Income Fund B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 13504264<F1>
<INVESTMENTS-AT-VALUE> 14486546<F1>
<RECEIVABLES> 379609<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 33430<F1>
<TOTAL-ASSETS> 14985345<F1>
<PAYABLE-FOR-SECURITIES> 382581<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 76490<F1>
<TOTAL-LIABILITIES> 459071<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 7797542
<SHARES-COMMON-STOCK> 548211
<SHARES-COMMON-PRIOR> 470255
<ACCUMULATED-NII-CURRENT> (4253)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (259106)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 982282<F1>
<NET-ASSETS> 8218396
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 688966<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (88259)<F1>
<NET-INVESTMENT-INCOME> 600707<F1>
<REALIZED-GAINS-CURRENT> (171585)<F1>
<APPREC-INCREASE-CURRENT> 1207816<F1>
<NET-CHANGE-FROM-OPS> 1636938<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (345970)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 184393
<NUMBER-OF-SHARES-REDEEMED> (117446)
<SHARES-REINVESTED> 11009
<NET-CHANGE-IN-ASSETS> 1758127
<ACCUMULATED-NII-PRIOR> 1245<F1>
<ACCUMULATED-GAINS-PRIOR> (87521)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 72316<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 357369<F1>
<AVERAGE-NET-ASSETS> 7234725
<PER-SHARE-NAV-BEGIN> 13.738
<PER-SHARE-NII> .685
<PER-SHARE-GAIN-APPREC> 1.260
<PER-SHARE-DIVIDEND> (.692)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.991
<EXPENSE-RATIO> 1.01
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 073
<NAME> VKAC New Jersey Tax Free Income Fund C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 13504264<F1>
<INVESTMENTS-AT-VALUE> 14486546<F1>
<RECEIVABLES> 379609<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 33430<F1>
<TOTAL-ASSETS> 14985345<F1>
<PAYABLE-FOR-SECURITIES> 382581<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 76490<F1>
<TOTAL-LIABILITIES> 459071<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 443873
<SHARES-COMMON-STOCK> 30966
<SHARES-COMMON-PRIOR> 17804
<ACCUMULATED-NII-CURRENT> (4253)<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (259106)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 982282<F1>
<NET-ASSETS> 464479
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 688966<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (88259)<F1>
<NET-INVESTMENT-INCOME> 600707<F1>
<REALIZED-GAINS-CURRENT> (171585)<F1>
<APPREC-INCREASE-CURRENT> 1207816<F1>
<NET-CHANGE-FROM-OPS> 1636938<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (15301)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12868
<NUMBER-OF-SHARES-REDEEMED> (755)
<SHARES-REINVESTED> 1049
<NET-CHANGE-IN-ASSETS> 219624
<ACCUMULATED-NII-PRIOR> 1245<F1>
<ACCUMULATED-GAINS-PRIOR> (87521)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 72316<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 357369<F1>
<AVERAGE-NET-ASSETS> 329166
<PER-SHARE-NAV-BEGIN> 13.753
<PER-SHARE-NII> .706
<PER-SHARE-GAIN-APPREC> 1.233
<PER-SHARE-DIVIDEND> (.692)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.000
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 081
<NAME> Van Kampen American Capital New York Tax Free Income Fund
A
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 14433522<F1>
<INVESTMENTS-AT-VALUE> 15586465<F1>
<RECEIVABLES> 603619<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 141539<F1>
<TOTAL-ASSETS> 16417383<F1>
<PAYABLE-FOR-SECURITIES> 783435<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 120334<F1>
<TOTAL-LIABILITIES> 903769<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 5076981
<SHARES-COMMON-STOCK> 355842
<SHARES-COMMON-PRIOR> 214785
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (7788)<F1>
<ACCUMULATED-NET-GAINS> (308696)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 1152943<F1>
<NET-ASSETS> 5354675
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 788239<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 97012<F1>
<NET-INVESTMENT-INCOME> 691227<F1>
<REALIZED-GAINS-CURRENT> (150409)<F1>
<APPREC-INCREASE-CURRENT> 1493429<F1>
<NET-CHANGE-FROM-OPS> 2034247<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (226467)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 178498
<NUMBER-OF-SHARES-REDEEMED> (46443)
<SHARES-REINVESTED> 9002
<NET-CHANGE-IN-ASSETS> 2438009
<ACCUMULATED-NII-PRIOR> 215<F1>
<ACCUMULATED-GAINS-PRIOR> (158287)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 81041<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 351616<F1>
<AVERAGE-NET-ASSETS> 3985739
<PER-SHARE-NAV-BEGIN> 13.579
<PER-SHARE-NII> .821
<PER-SHARE-GAIN-APPREC> 1.476
<PER-SHARE-DIVIDEND> (.828)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.048
<EXPENSE-RATIO> .21
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 082
<NAME> Van Kampen American Capital New York Tax Free Income Fund
B
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 14433522<F1>
<INVESTMENTS-AT-VALUE> 15586465<F1>
<RECEIVABLES> 603619<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 141539<F1>
<TOTAL-ASSETS> 16417383<F1>
<PAYABLE-FOR-SECURITIES> 783435<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 120334<F1>
<TOTAL-LIABILITIES> 903769<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 9203670
<SHARES-COMMON-STOCK> 647820
<SHARES-COMMON-PRIOR> 598375
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (7788)<F1>
<ACCUMULATED-NET-GAINS> (308696)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 1152943<F1>
<NET-ASSETS> 9747319
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 788239<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 97012<F1>
<NET-INVESTMENT-INCOME> 691227<F1>
<REALIZED-GAINS-CURRENT> (150409)<F1>
<APPREC-INCREASE-CURRENT> 1493429<F1>
<NET-CHANGE-FROM-OPS> 2034247<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (459895)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 139452
<NUMBER-OF-SHARES-REDEEMED> (104963)
<SHARES-REINVESTED> 14956
<NET-CHANGE-IN-ASSETS> 1622379
<ACCUMULATED-NII-PRIOR> 215<F1>
<ACCUMULATED-GAINS-PRIOR> (158287)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 81041<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 351616<F1>
<AVERAGE-NET-ASSETS> 9219524
<PER-SHARE-NAV-BEGIN> 13.578
<PER-SHARE-NII> .713
<PER-SHARE-GAIN-APPREC> 1.476
<PER-SHARE-DIVIDEND> (.721)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.046
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 083
<NAME> Van Kampen American Capital New York Tax Free Income Fund C
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 14433522<F1>
<INVESTMENTS-AT-VALUE> 15586465<F1>
<RECEIVABLES> 603619<F1>
<ASSETS-OTHER> 85760<F1>
<OTHER-ITEMS-ASSETS> 141539<F1>
<TOTAL-ASSETS> 16417383<F1>
<PAYABLE-FOR-SECURITIES> 783435<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 120334<F1>
<TOTAL-LIABILITIES> 903769<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 396504
<SHARES-COMMON-STOCK> 27366
<SHARES-COMMON-PRIOR> 11990
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> (7788)<F1>
<ACCUMULATED-NET-GAINS> (308696)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 1152943<F1>
<NET-ASSETS> 411620
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 788239<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 97012<F1>
<NET-INVESTMENT-INCOME> 691227<F1>
<REALIZED-GAINS-CURRENT> (150409)<F1>
<APPREC-INCREASE-CURRENT> 1493429<F1>
<NET-CHANGE-FROM-OPS> 2034247<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (12868)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 15339
<NUMBER-OF-SHARES-REDEEMED> (352)
<SHARES-REINVESTED> 389
<NET-CHANGE-IN-ASSETS> 248800
<ACCUMULATED-NII-PRIOR> 215<F1>
<ACCUMULATED-GAINS-PRIOR> (158287)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 81041<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 351616<F1>
<AVERAGE-NET-ASSETS> 262817
<PER-SHARE-NAV-BEGIN> 13.579
<PER-SHARE-NII> .711
<PER-SHARE-GAIN-APPREC> 1.472
<PER-SHARE-DIVIDEND> (.721)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.041
<EXPENSE-RATIO> .98
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>
This item relates to the Fund on a composite basis and not on a
class basis.
</FN>
</TABLE>